UK supermarkets are losing up to £300 million every year on their online delivery models because their current financial models are designed to operate at a loss. To bring sustainability to the rapidly growing market, Kurt Salmon research suggests that a new business model is called for, one that is honest to customers about the true cost of the services they expect.
According to research from Kurt Salmon, delivered exclusively to Retail Week, the online delivery business units of supermarkets could be costing the companies up to £300 million every year. The study finds that there are costs of between £28 and £30 on the fulfilment of every online order of £100. These costs are made up of hidden externalities, including wages, marketing, fuel, vehicle leasing and distribution.
The data reveals however, that, given the margins supermarkets are generating – £25 for every £100 order for the around 90 million home delivery orders – home deliveries are costing them between £3 and £5. This suggests that many supermarkets are hiding the true cost of their delivery services under their broader operating and marketing costs.
Even when customers pay an additional between £1 and £6 for home deliveries, the actual cost of the “final mile” to the customers’ door is £8 and £9, showing that supermarkets are likely to be loss making on such deliveries. “The first step on the journey to profitability must be grounded in a robust financial model, with transparency of all costs,” remarks Dan Murphy, Partner at Kurt Salmon.
Going online at high cost
The move to provide consumers with omni-channel shopping options within the supermarket space has, in recent years, been widely adopted, yet it is not currently generating a profit for any of the supermarkets involved. The services have been “destroyed” according to Sainsbury’s online boss Robbie Feather because of the undercharging for delivery. To move forward, businesses need to reconsider the cost of deliveries, while ending unprofitably undercutting each other to try to win initial market share.
Given that, according to Murphy, “online shopping is no longer an interesting experiment, it is here to stay,” with the online grocery market “alone forecast to grow from £9 billion to £18 billion over the next few years”, the question of how to move toward sustainability now becomes pertinent. Murphy suggests that moving forward will require retailers to come with sustainable financial models, “with full profit and loss transparency for the channel, clear ownership and accountability for all related costs and a realistic business case.”
Being honest with customers
According to Kurt Salmon’s analysis, margins for supermarkets are only set to tighten in the coming years, as the minimum wage is increased, wages for lorry drivers increase on the back of qualified personnel and competition from international low-cost supermarkets cut into margins.
The new business models used by supermarkets to deliver their onmi-channel services will therefore likely see increases in charges to customer, in line with the reality of costs. The consultancy suggests that “being honest with their customers” about the true externality cost of their unrealistic expectations surrounding delivery, would allow the market to gain some rationality and balance in the long term.