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Online grocery business: Three ways to a key revenue stream

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Online grocery has been a critical topic in the e-commerce landscape for years. Almost daily, we hear that the latest innovations and business models are about to revolutionize food shopping.

Given the enthusiasm that this topic triggers among journalists, customers, and market observers, a frequently disregarded fact is that many food retailers are wary of new sales channels, due to the difficulty of making online grocery attractive for the customer and profitable for the retailer.

Low margins and high costs: Profitability of online grocery feels the squeeze

The profitability of online grocery is under pressure from various sides. Firstly, the food business is subject to fierce price competition, leading to extremely low margins compared with other product categories. Secondly, logistics processes must be in place to provide the customer with convincing online grocery offerings, especially if the food is to be delivered to the customer’s door.

Many companies are working to overcome the discrepancy between low margins and high costs. In principle there are two approaches:

A. They can work on optimizing processes to cut costs by means of increased efficiency: Ocado demonstrates just how labor and cost-intensive these endeavors can be. The UK online grocery retailer has spent over a decade improving its picking processes, developing at its own expense extremely innovative picking robots.This has enabled Ocado to reduce process costs and become a technology provider for competitors, but the road to this lucrative market position was likely difficult.

B. Companies involved in the online grocery sector can try to increase their earnings: However, increasing product prices or charging customers delivery costs are not popular, so retailers like Amazon, Albertsons, Kroger, and Walmart have initiated cooperation arrangements with their Consumer Packaged Goods (CPG) sector suppliers, aiming to generate extra income to cross-finance their own online grocery offerings.

Three ways online grocery retailers can generate a revenue stream

Three options for online grocery retailers to increase earnings and create a consistent revenue stream are outlined here in greater detail.

Option 1: Direct advertising in the online shop

Advertising subsidies are standard in the brick-and-mortar business. For decades manufacturers have contributed toward retail advertising campaigns, or bought better shelf positions by means of cash funding or goods supplied free of charge, with the hopes of gaining customer attention and influencing purchasing decisions.

Therefore, it’s surprising that retailers with roots in brick-and-mortar have seldom made this established practice a part of their e-commerce projects. Instead, Amazon has pioneered this approach like many others. As the author and digitization expert Scott Galloway said recently, “Whereas Walmart and Target monetize only 1 percent of their searches, Amazon has figured out a way to monetize 16 percent.”

Traditional food retailers should remember that both their retail and online shops offer an extremely attractive advertising environment. Advertising online is just as much point-of-sale advertising as classical in-store campaigns. It too reaches customers when they are about to act on their intention to purchase a product, and the prospect of gaining the customer’s attention at this decisive moment is worth its weight in gold for CPG brands. For the retailer, it is an opportunity to earn money online not only by selling goods, but also by selling attention.

There is a wide range of formats to use. The digital equivalent of the optimal shelf position is the sponsored listings, with the manufacturer paying for their products to be prominently placed in response to selected search queries or on category pages.

This is a lucrative source of revenue for the retailer, but sponsored listings might impair the customer’s user experience – for example, by making what the customer wants hard to find between several sponsored products. Therefore, retailers should attach great importance to a thorough analysis of their shop and to consistent A/B testing to reconcile their commitment with actual customer needs.

In addition to sponsored listings, retailers can direct customer attention to the products of certain manufacturers in other ways. From brand shops via newsletter campaigns to inspirational product recommendations – including images and videos – there are no limits to the creativity that can be employed. By using smart ad servers and links with anonymized CRM data, retailers can cluster customers by specific criteria, thereby personalizing advertising to entice interested manufacturers.

These measures are not just for larger retailers. Smaller, niche online shops can also be of interest as advertising media for manufacturers in the CPG sector. It could make sense to collaborate with an external marketer who represents a large number of smaller shops vis-à-vis the distribution departments of manufacturers, and to participate in the marketer’s network.

Option 2: Word-of-mouth marketing

As a rule, people consider recommendations they receive from people they know to be more credible than classical advertising. In a 2016 survey, market researchers at Harris Interactive found that 82 percent of Americans looking for a certain product trusted their friends’ recommendations. Confidence in product reviews by other (unknown) customers is also significant.

These findings are nothing new, which is why many companies seek to positively influence word-of-mouth propaganda, or get it going in the first place. These and related activities fall into the category of word-of-mouth marketing. Attractively presented content, cooperation with relevant influencers, and provision of free product samples for a selected group of people are ways to enthuse potential customers and create positive conversations about brands and products.

Even when CPG manufacturers develop creative and emotional marketing ideas, they often lack direct customer access, which is required to make a campaign sufficiently widespread. However, food retailers often have these customer contacts. Thanks to content offerings like recipe websites, customer magazines, or blogs they have built a large community and actively developed customer relationships by means of comprehensive loyalty programs.

This customer base is a substantial reservoir for word-of-mouth marketing activities that retailers can place at the disposal of interested manufacturers. The large amount of card data about customers’ purchases allow retailers to offer manufacturers a plethora of prospective customers whose preferences tally with what the manufacturer has to offer. That creates a win-win situation for manufacturers and customers, the positive repercussions of which could benefit the retail intermediary.

Option 3: Targeting and measuring success via anonymized profile data  

Manufacturers are generally not in direct contact with the end customer in the traditional B2C supply chain. So unless they have established a direct sales channel, their opportunities to collect genuine data about the actual users of their products are limited. Despite this, manufacturers have a keen interest in the opinions of their target group. After all, it’s extremely difficult to arrive at a final verdict on the success of a new product or advertising measure without the necessary data.

Retailers, in contrast, are in direct contact with the end customer and have developed various ways of collecting data and better understanding consumer needs. Thanks to customers’ activities online, or the use of customer cards in physical stores, retailers can follow purchasing decision processes and behaviors of individual customers, giving them very reliable data that manufacturers lack.

Retailers have come to realize that their treasure trove of data is of priceless value not only for them, but also for their suppliers, and have developed mutually advantageous ways to share it. For example, Albertsons offers CPG partners an opportunity to measure online advertising success by means of anonymized data from its in-house loyalty program.

That involves a three-stage process. By means of existing data, a target group is defined then targeted in an advertising campaign with a call to action like a voucher for the online shop or nearest physical store. Success of the advertising measure can be measured on the basis of genuine data by knowing what customers actually purchase in the online shop or with their customer card. In this way, retailers can help their suppliers use their advertising budget more efficiently.

CPG + food retailers = the future of grocery

Food retailers face greater challenges than retailers in other product categories when it comes to digitizing their business model. The discrepancy between low margins and high process costs makes it almost impossible for many companies to build a profitable online grocery business.

Developing cooperation models with CPG manufacturers provides an opportunity to earn revenue from selling products AND attention, thereby allowing retailers to significantly lower the profitability hurdle, and maybe even clear it!

Ready to streamline profits and grow your online grocery revenue? Learn more here

Thorsten Treder
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14 shares
February 12, 2019
Thorsten Treder

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