Why can’t the online grocery business make it big?

The grocery delivery logistics business has the potential of large revenue, but really thin margins. Still, the big players can’t afford to take a pass on the opportunity.

But look more closely at the report, and you see the major challenges these companies will face as they try to make these fledgling businesses viable. IBIS World estimates that the online grocery business collectively brought in $10.9 billion in sales in 2014.  Profit, it estimates, was just $927.1 million, or 8.5 percent of total revenue.  By 2018, the researchers project that profit margins will slip to 6.9 percent of sales.  In part, that’s because these operators will continue to contend with the high distribution costs associated with getting perishable items to customers.
The report also predicts that big players, particularly AmazonFresh, will play a role in compressing margins for the whole industry.  Amazon has often sought to vanquish its competitors by undercutting them on price, and the report suggests that the company may use that tactic in the grocery business, dropping their prices as low as possible and, in doing so, pressuring their competitors to make similar price cuts. (Jeffrey P. Bezos, the chief executive of Amazon, owns The Washington Post.)
Even though it’s a tough business model right now, report author and industry analyst Will McKitterick says companies of all stripes feel they can’t afford not to take a chance on it.
“For larger companies, it’s definitely a process to build the infrastructure, develop the delivery networks,” McKitterick said. “All of that takes a lot of time, and if they miss the boat now, then they’re going to be in a pretty bad position” later on if throngs of consumers take to online grocery shopping.

www.washingtonpost.com

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