Amazon Expands Grocery Delivery Service To Los Angeles Area
Kevork Djansezian/Getty ImagesAmazon.com began grocery delivery on a trial basis in Los Angeles last year.
By Emma Thomasson

BERLIN -- Big retailers are taking a calculated hit to margins to invest in online grocery operations, in the hope they can persuade consumers to add more profitable items such as clothes and computers to their orders of fruit and vegetables.

Food has been one of the last things to move online because complex logistics for fresh, chilled and frozen products make it an expensive business. Retailers are also reluctant to lose the potential for the lucrative impulse buys that occur in-store.

However, retailers in Europe and North America are now ramping up their online food offer to compete with Amazon.com (AMZN), which is expected to expand its sale of fresh produce beyond a few trial areas with the aim of complementing its non-food sales -- and eating other retailers' lunch.

It is notoriously difficult to make money selling groceries online.

"They are trying to hook customers up to brands for their grocery shop and hope they will spend on non-food, which is lower headache and higher margin, which will drive profitability," said Sophie Albizua of retail consultancy eNova Partnership.

"It is notoriously difficult to make money selling groceries online. The reason why people do it and need to do it have nothing to do with profit and nothing to do with groceries."

Britain has led the way in selling groceries online, with e-commerce already accounting for some 5 percent of food sales. Other countries such as France are now catching up and the Boston Consulting Group predicts the global market will grow to $100 billion by 2018 from $36 billion in 2013.

'Compelling Economics'

It has taken Tesco, Europe's second biggest retailer, 17 years to bring its online grocery business close to the industry-leading margins it used to make in its store business.

Tesco made a trading profit of 127 million pounds ($216 million) on online grocery sales of 2.5 billion pounds in 2013, equal to an operating margin of around 5 percent. That beat the 3.7 percent Tesco reported for the group in 2013 -- after it was hit by restructuring costs -- but came in below group margin at or above 6 percent for the previous three years.

Some analysts suggest that Tesco should focus less on investment in costly e-commerce technology and logistics and more on cutting prices if it wants to stop losing market share in Britain to German discounters Aldi and Lidl.

But Tesco says it isn't building its online business for the sake of it: The aim rather is to attract more big-spending food shoppers who also buy general goods, which traditionally sell at much higher margins than groceries.

Tesco customers who buy food online as well as in store spend twice as much as those who only shop in store. Those who also buy general merchandise spend three times as much -- although only 4 percent of customers are currently in that last category.

Tesco, which still runs separate operations for online groceries and general merchandise, plans to combine its grocery and general goods deliveries -- leveraging the sophisticated logistics network it has built up for food to cut costs for the company, and offer customers a faster service.

The one-hour delivery slots that Tesco offers seven days a week for grocery orders are unmatched by any other general merchandise retailer, including Amazon, points out Tesco multichannel director Robin Terrell.

"As we start to add additional items or additional products to each of those deliveries, the economics become incredibly compelling for us but also a much more compelling offer for customers," Terrell said.

It's a service that would make customers take notice, said Helen Merriot, head of consultancy Accenture's retail practice in Britain.

"If they could combine food and non-food and do that in a really efficient way, using their own supply chain in a joined-up way to get that to the customer when the customer wants it, it would be really powerful," Merriot said.

Slim Margins, Superior Delivery

British retailer Ocado, on track to make its first annual pretax profit this year since it was founded in 2000, set up an online pet store last year from which customers now order goods alongside their food, and plans a kitchen and homeware online store later this year.

Ocado said last week over 30 percent of its orders now contain at least one non-food item as customers benefit from the convenience of the firm's one-hour delivery slots.

Deutsche Bank (DB) analysts Niamh McSherry and James Collins predict that general merchandise will grow to 9 percent of Ocado's sales by 2023 from about 3 percent today.

"This is key for the Ocado investment case, namely because it could support the profitability of grocery online retailing and thereby facilitate further penetration of the grocery market," they wrote in a note.

Dutch retailer Ahold, which runs U.S. online grocer Peapod as well as sites for groceries and general goods in the Netherlands and Belgium, is another that plans to keep investing in e-commerce despite the hit to profitability.

In the first quarter, online sales for all Ahold's e-commerce sites grew 20 percent to 362 million euros ($493.79 million), while the group's underlying operating margin slipped to 4 percent from 4.1 percent a year ago. Its online grocery businesses have yet to break even but its Bol.com general merchandise site made an unspecified profit in 2013.

Ahold is using its network of supermarkets as pick-up points for non-food online orders from sister firm Bol.com in the same way that Waitrose in Britain does with partner John Lewis.

Britain's Asda is also investing in collection points, including in car parks of London tube stations, garnering useful information for its owner Walmart Stores (WMT), which is testing online grocery in its home market as part of a bigger plan to integrate e-commerce into its sprawling network of stores.

The world's biggest retailer, which made more than $10 billion in e-commerce sales of non-food items last year, warns that investment in online will eat into profits this year.

Amazon Advances

Most of these traditional players are hoping to have established a bulkhead before Amazon expands its "Fresh" service, which is already combining deliveries of groceries and non-food orders in a few trial U.S. cities like its hometown Seattle.

In areas where AmazonFresh is available, trucks are bundling orders of groceries with a pasta meal or fresh fish from local specialty stores Amazon is partnering with, as well as non-food items like digital cameras and video games.

"Customers who are using our service are not just satisfying one shopping occasion but many shopping occasions," Doug Herrington, Amazon vice president consumables, told the Consumer Goods Forum industry summit in Paris last month.

Bernstein Research predicts that AmazonFresh could generate an operating margin as high as 13 percent in denser urban areas once it overcomes logistical challenges to reach scale.

"A roll out of Fresh could have a material positive impact on order frequency, loyalty, and spend in other non-grocery related categories," Bernstein analysts wrote in a recent report.

Amazon's Herrington expects the pace of delivery will be his future battleground.

"We have yet to find customers who are begging us for slower delivery," he said. "They are going to demand a shorter and shorter window from when you purchase it to when it arrives in your home."

-Additional reporting by Martinne Geller and James Davey.


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17 Comments

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mac2jr

Mac2SR, happy to make your aquantance, and I welcome you back from the grave, you died about 16 years ago, or didn't you know?

July 08 2014 at 10:06 PM Report abuse +1 rate up rate down Reply
1 reply to mac2jr's comment
true.liberal

The apple doesn't fall far from the tree.

July 09 2014 at 10:32 AM Report abuse rate up rate down Reply
supermolar

now they will be able to sell even crappier food since the consumer won't see it till he opens the package in his kitchen

July 08 2014 at 9:58 PM Report abuse +1 rate up rate down Reply
mac2jr

People, read read read...

Read what I said, I did NOT say they sold the same item 52 times in a week. If you buy the item for $1.00, and sell it for $1.01 you have earned a penny, if take the dollar and reinvest it the next week, and sell for $1.01, you have now made 2 cents off the original dollar, if you do this every week for one year, you have made 52 cents off your original dollar investment..

Most stores actually make up to $15 or more for each dollar invested on some items, as Turnover is faster on some products or the margin is set much higher.

A 70% (3.33 x cost) selling markup is common in the Retail industry for very slow moving inventory. Books usually carry a 40 to 60% markup, as the author gets 20 to 40% of each sale.

Insurance agents generally get 70 to 90% on the original year's policy premiums, and 5% for each year's renewal.

Supermarkets get from 1% to 4% on most high volumn items, and up to 100% on slow movers..

July 08 2014 at 5:53 PM Report abuse +3 rate up rate down Reply
1 reply to mac2jr's comment
mac2sr

I can see why you have failed at everything you have tried in life, my son.

July 08 2014 at 8:47 PM Report abuse rate up rate down Reply
kellytkck

I use Safeway home delivery to shop for groceries for my elderly mom. They do an amazing job and the meat and produce they choose is top quality. They provide an amazing service not only for the elderly but for busy working families that don't have time to shop . . . Try it and you will love it ! !

July 08 2014 at 5:43 PM Report abuse +3 rate up rate down Reply
1 reply to kellytkck's comment
mac2jr

Yes, many local branches of stores cater to the Senior and Handicap population by doing home delivery. Also there are 'shoppers', people that visit the elderly and handicapped and take the orders, then do the shoppng for him or her. This is a valuable service, but can be costly.

July 08 2014 at 5:55 PM Report abuse +2 rate up rate down Reply
cqdeed

Ok, I'll try it. Mail me a gallon of milk.

July 08 2014 at 5:34 PM Report abuse -4 rate up rate down Reply
aazzqq

No way I would trust some idiot working at Amazon to pick out the fresh fruit, veggies, or ESPECIALLY the meat I want.

July 08 2014 at 2:25 PM Report abuse +2 rate up rate down Reply
Iselin007

Maybe can use all the empty and vacant brick and mortar stores for homeless shelters.

July 08 2014 at 2:09 PM Report abuse -1 rate up rate down Reply
1 reply to Iselin007's comment
mac2jr

Close up 90% of the military bases and use each for the homeless. Our military is to Protect the Homeland, not Isreal, Africa, Asia, Japan, Germany, Saudi Arabia, Iraq, Syria, England, etc.

Now if you want to help the Homeless, then put them to work cleaning our roads and streets, building homes in depressed areas like most of our cities and close-in suburbs, etc.

As for the Brick and Mortar stores going out of business, you only have to look to Wallymart and Hommydepot for the answers to why...

Wake up America, WAKE UP, .... please...

July 08 2014 at 2:16 PM Report abuse +2 rate up rate down Reply
mac2jr

ROI (Return on Investment) in the grocery industry is the 'Key' to the success of the industry. If one invest $1.00 in product 'A' and $1.00 in product 'B', then one waits one year as it sells both, one can calculate his or her ROI.

The second factor is 'Turnover', how many times can that investment of $1.00 be used to buy and sell at a profit in a set period.

Many food stores work off of a Net Profit of 1% per $1.00 invested and sold, thus if the item is sold once in a year, the ROI is 1% or $00.01.. But if the Turnover is once per week, then the ROI is 52% or $00.52, not counting the compounding. Making 52 cents on each $1.00 invested is pretty good, considering that money in a current savings account at the local bank returns less than $00.002 per year at this time...

July 08 2014 at 10:59 AM Report abuse -3 rate up rate down Reply
2 replies to mac2jr's comment
Valerie

@ mac --- What dream world are you living in??? The grocery business is well-known for having a slim profit margin. The idea that they are making 52 cents for every dollar invested is ridiculous.

July 08 2014 at 12:06 PM Report abuse rate up rate down Reply
1 reply to Valerie's comment
mac2jr

Learn to Read, please.....

July 08 2014 at 2:12 PM Report abuse +1 rate up rate down
progressivehoax

More Liberal math? Fail

July 08 2014 at 12:18 PM Report abuse rate up rate down Reply
2 replies to progressivehoax's comment
Iselin007

They should calculate the losses in actual employees at the brick and mortar stores because Online retailers have less employees and mamy that they do have are contractors.

July 08 2014 at 2:05 PM Report abuse rate up rate down
mac2jr

No, the math is conservative, it is how to change a penny into a dollar... Basic economics, do your homework...please..

July 08 2014 at 2:13 PM Report abuse rate up rate down