The e-grocery challenge:

Moving toward
profitable growth
Winning online was a priority for growth in grocery
retail even before the onset of the pandemic. Now,
with the increased customer penetration and intent
to stick to buying online, e-commerce acceleration
and profitability have turned into top priorities for
many European grocers.
by Madeleine Tjon Pian Gi and Julia Spielvogel

+ Interview with Per Strömberg

on page 74

1 Disruption and Uncertainty – The State of Grocery Retail 2021: Europe

Gaining market share in grocery retail in the As the online channel has matured, grocers
past few years has increasingly been linked have diversified their online value propositions
to winning online. Before the onset of the to cater to or shape customer expectations.
pandemic, online business models were the Offerings now extend beyond the classic
primary growth driver within grocery retail. In home delivery of families’ weekly groceries
the United Kingdom, for example, between to address different customer segments,
2015 and 2020, online accounted for more needs, or shopping occasions through instant
than one-third of the industry’s growth. Now, grocery delivery, fresh ready-to-cook, meal
with the changes brought about by COVID-19— delivery, and the like. Just as in the offline
high online grocery penetration levels and world, a differentiated online value proposition
customers’ stated intent to continue to do is crucial—especially given that in more mature
their shopping online—e-grocery is the new online grocery markets, winners tend to
imperative. The results of our grocery retail capture a large share. Incumbent grocers that
CEO survey (see chapter 2) underscore this: are not in a position to feasibly invest in their
respondents see the scaling of their online own winning online business are increasingly
businesses as a top priority for 2021 and opting for partnerships with ecosystems or
beyond. Many retailers are currently investing for M&A with pure players and start-ups (for
in their online business to gain a larger share of example, Monoprix, DIA, and others partnering
customers’ wallets and stomachs. In this game, with Amazon; Morrisons and others partnering
they are up against pure online competition, with Ocado; Reitan partnering with Kolonial.no;
as well as against alternative business models, Carrefour investing in ecosystem expansion
such as meal-kit providers and meal-delivery with the acquisition of stakes in Dejbox and
platforms—business models that are often Quitoque; and so on). Strategic moves like
much more highly valued by investors due to these allow grocers to test new propositions,
their high growth expectations. accelerate time-to-market, and benefit from
their partners’ capabilities in the online game.
At the onset of the COVID-19 crisis, customer
demand grew rapidly within just a few months. Reaching profitability in online grocery, even
Some grocers, such as Tesco in the United only at basket level before central cost,
Kingdom, were able to quickly react and meet has always been a challenge for retailers.
the demand, and thus their online share of Compared with store-based business, which
sales expanded by up to 15 to 20 percent. mostly proves profitable also after depreciation
Many other retailers, however, faced capacity and interest, even leading e-grocery players
and execution constraints in trying to fulfill the have struggled to be profitable, particularly
rising demand, often causing a poor customer while generally chasing expansion. To increase
experience. While consumer research capacity and stay competitive, grocers need to
indicates that the recent change in demand continue to invest in operational infrastructure,
is likely to persist at least in part, stickiness technology, and so on. This ongoing investment
unsurprisingly is highest among customers makes it difficult to improve profitability, even
with a satisfactory experience. Grocers over time. Key value drivers that grocers can
acting decisively now to offer satisfactory optimize include average order value and
propositions and experiences aimed at gaining frequency through their commercial offer (for
share and creating loyal customers will likely example, assortment, price, personalization,
reap the rewards. and delivery fees). Media monetization can

Disruption and Uncertainty – The State of Grocery Retail 2021: Europe 2

 be an additional source of income. Beyond 1. Online pure players
that, grocers need to optimize operational and Online pure players often provide highly
delivery costs (Exhibit 1). Given the current tailored customer value propositions, such as
market dynamics in which grocers are reaching value-focused assortments and service levels,
substantial online shares, cracking online fresh meal kits, or farm-to-table concepts.
profitability over time is essential. They do not face the same limitations as offline
retailers, which are often bound by the need
With increasing scale and retailers more to maintain certain levels of consistency in
systematically addressing optimization levers, pricing, promotions, and assortment across
more profitable online grocery models have channels—or by the need to deal with legacy
started to emerge—at least for ramped-up systems and infrastructure. Leveraging
businesses. According to Tesco CEO Ken digital and analytical approaches, tools, and
Murphy, the company is aiming to move closer capabilities in their workforce, pure players
to parity in terms of operating contribution typically put a focus on differentiating and
from online and offline, which he defined as a personalizing their customer experience to
realistic possibility in the “foreseeable future” achieve higher conversion rates, larger basket
in a recent analyst call. Partnership approaches sizes, longer-term loyalty, and—ultimately—
also often aim to improve economics—for greater customer lifetime value. Leading pure
example, through generating sourcing players often deploy modern technology
advantages or benefiting from better drop throughout their supply chains to optimize
density in crowdsourced last-mile operations fulfillment and delivery costs (for example,
for instant delivery models. Finding a way to through microfulfillment centers or optimized
win share online while building a profitable last-mile vehicle deployment). While staying
business model is going to be one of the key light in assets and overhead compared with
challenges for many grocers going forward. store-based competitors, pure online players
seek out purchasing and logistics partnerships
Three pathways to to benefit from scale effects.
profitability
With the current online outlook characterized An example of a leading pure player is Picnic,
by high customer penetration and likely a Dutch no-frills online grocer that provides its
sticky demand, players are pursuing different customers with a user-friendly app combined
strategies to try to achieve both growth with competitive prices, a low minimum
and higher profitability or even profit parity. order value, and no delivery fees. Drawing
At the same time, common themes keep on advanced analytics and a fit-for-purpose
resurfacing—such as differentiating customer technology stack developed entirely in-house,
value propositions; optimizing and automating Picnic optimizes order preparation and last-
the “operations system”; and implementing mile logistics. The retailer increases efficiency
cutting-edge digital, analytics, and tech through a targeted assortment, warehouse
tools and capabilities, often enabled through automation, and a milkman-run logic where
ecosystem partnerships. Overall, there are electric delivery vehicles only visit a given area
three key types of players that are currently once or twice a day to increase the density of
dominating online grocery: deliveries in the last mile. A new partnership

3 Disruption and Uncertainty – The State of Grocery Retail 2021: Europe

Exhibit 1

Online grocers can leverage key drivers, such as

operational and delivery costs, to create value.
Structure of basket economics, excludes sales cannibalization Key value drivers, typical cost as %
of other channels of sales in stock-up proposition
Average order value Average order value
Key to cover fixed cost per delivery; under
Average order value, pressure through more frequent purchases,
excluding value-added tax lower delivery fees, subscription models, etc;
can be pushed with dedicated measures—
Media monetization from assortment, pricing, and promotions over
minimum order value and fees to personaliza-
Delivery or service fees tion and enhanced user experience

Cost of goods sold Media monetization, >3–5%

Additional source of income that flows
Waste and stock loss directly through to bottom line; includes
supplier bonuses for online, as well as
monetization of data and advertisements
Gross margin

Picking costs Delivery or service fees (or subscription

income), ~2–4% for fees
Flows directly through to bottom line and can
Other operational costs1 boost size of basket if linked to order value; in
many markets, decreasing due to subscrip-
Delivery costs tion offerings and competition for low-fee
delivery players
Marketing costs
Picking and other operational costs,1
Basket profitability ~11–14% (store picking, excluding inbound)
Major cost item; can be optimized by
choosing optimal fulfillment model for local
Directly incurred fixed costs2
demand level (eg, automated fulfillment
centers), as well as operational excellence in
Depreciation3 all processes and system support; operational
cost lower in automated models at expense of
Channel contribution higher capital expenditures

Allocated store costs4 Delivery costs, ~10–13%

Major cost item; can be optimized by
HQ-allocated costs5 operational excellence in loading and
unloading processes, route optimization, and
vehicle design, as well as by smoothing and
Fully loaded contribution increasing density of demand (eg, through
dynamic slot pricing or a milkman-run model)

1
Includes credit card commissions, contact centers, replenishment, inbound supply chain, and consumables.
2
Includes directly incurred store costs, IT, and e-commerce teams.
3
Depreciation includes depreciated capital expenditures for online-related investments, such as website build costs and equipment.
4
Includes utilities, back-room use, and other costs that would be incurred with or without the online business but are allocated to online.
5
Includes items such as central office costs, central IT costs, and pension funds.
Source: McKinsey analysis

Disruption and Uncertainty – The State of Grocery Retail 2021: Europe 4

Incumbents can learn
several UK grocers, including Morrisons, Co-
op, and M&S, and also by discounters including

from ecosystems to
ALDI. The platforms aggregate demand across
retailers, and via crowdsourced drivers, they
operate at costs that retailers are not likely to
take an omnichannel attain on their own.

approach to customer- 2. Ecosystems

Many online giants have added grocery to
lifetime value their ecosystems and are using customer
data from across their offerings—such as
creation—driving nonfood, payments, and social media—for
optimization purposes. For these players, their
customer loyalty across grocery divisions do not necessarily need to be
profitable as stand-alone businesses; instead,
channels and ensuring the grocery operation supports the overall
profitability of the ecosystem by securing
services and products daily traffic and engagement on the platform,
thereby boosting loyalty and customer lifetime
that matter. value and allowing for different, new revenue
models, such as media monetization.

The Chinese ecosystem Alibaba has been

focusing on convenience for customers across
with German supermarket leader Edeka channels as it offers instant omnichannel
has been signed with the goal of optimizing shopping across categories. Through
product-sourcing costs. its Hema retail-store format—part tech-
enabled supermarket, part distribution
Incumbent players can learn from pure center—customers can order groceries on
players both to focus on differentiation their smartphones and either pick up their
toward customers and to align operations purchases or have them delivered within 30 to
with their value propositions (for example, by 60 minutes, depending on location. Alibaba’s
reducing the number of delivery windows if the logistics arm and payment solutions enable
proposition is not focused on convenience of this service. In fall 2020, Alibaba acquired from
delivery). Moreover, incumbents could consider Auchan the majority stake in Sun Art, with
entering partnerships with pure players to de- approximately 500 hypermarkets in China, to
risk their business models, reduce investments, further strengthen the group’s offline presence.
leverage external capabilities, or scale. These Across its many companies, offerings, and
include partnerships with crowdsourced or gig- channels, Alibaba is thus optimizing customers’
economy delivery platforms (such as Deliveroo total lifetime spending on the company’s
or Uber) for instant-delivery or meal-delivery products and services.
propositions—such as those recently set up by

5 Disruption and Uncertainty – The State of Grocery Retail 2021: Europe

Amazon also took its grocery offering to the 3. Own play by traditional retailers
next level through its acquisition of Whole Incumbent retailers with their own online
Foods in the United States. The deal not only offerings are striving to accelerate their
expanded Amazon’s sourcing capabilities but e-commerce businesses and reach profit
also allowed it to more deeply understand the parity. They are currently transforming their
customer food journey and provide customers businesses across many areas and making
with omnichannel offerings through Whole multiyear investments to improve and
Foods’ physical stores. The company also increasingly automate their operating systems
continues to expand in Europe—most recently and technology. Those that want to play an
with the introduction of Amazon Fresh in Spain active role in the online game often start by
and a deeper partnership with local player DIA. rethinking the value propositions that they
In all geographies, the Amazon Prime loyalty bring to customers. We have seen grocers
program connects grocery and nongrocery optimize their online assortments in terms of
platforms, while Amazon’s data, analytics, and size, private-label penetration, and (ultra-)fresh
e-commerce capabilities are being applied quality. We have also seen them increasingly
to improve the food journey. Amazon is also decouple pricing and promotions from online
experimenting with tech-enabled offline and the store-based business, given the
formats, such as Amazon Go (physical stores direct impact on profitability—while at the
with entirely automated checkouts) and the same time trying to leverage offline assets for
recently opened physical Amazon Fresh stores services like click and collect. Many grocers
in the United States. are doubling down on customer experience, for
example through basket-size personalization
Incumbents can learn from ecosystems to take or by rewarding loyalty via subscriptions or
an omnichannel approach to customer lifetime specific programs. In addition, they generate
value creation—driving customer loyalty across further income from online supplier bonuses
channels and ensuring, likely with partners, the or from monetization of digital assets to
addition of services and products that matter advertisements.
to them (for instance, seamless checkout and
payment). To capitalize on loyalty, cutting- Traditional retailers are also reimagining their
edge digital and analytics capabilities are operating systems—in particular by optimizing
prerequisites. Several incumbents have chosen their networks, order preparation models, and
to enter partnerships with leading ecosystems last-mile mix—given the importance of those
to create an online route to market or provide systems as cost drivers. To ensure future
a specific proposition. The partnerships bring capacity and maximize profitability, grocers
scale, infrastructure, and capabilities that the must set up an operational network that fulfills
retailer would otherwise likely take years to the forecasted demand and service-level
build. However, fully owning customer data or mix in a region at the lowest total operating
ensuring the extension of loyalty to stationary cost. The right level of automation can make
stores can turn out to be challenging in a large difference. For example, grocers can
these partnerships. elevate picking productivity from an average

Disruption and Uncertainty – The State of Grocery Retail 2021: Europe 6

 Exhibit 2

For profit parity to materialize, several drivers

across three domains need to come together.
Ecosystem partnerships

Superior CVP
1. Customer needs
and UX
2. Customer lifetime
and operations
value optimization
synchronization

1 2

Profit parity
success

Operational Cutting-edge
excellence 3
digital, analytics,
and tech

3. Order and delivery

optimization and
automation

Customer value proposition (CVP) Fulfillment Media and data monetization

• Mix of propositions • Excellence in warehouse operations • Digital assets
• Basket size push (eg, price, (processes and advanced analytics) • Vendor allowances, bonuses, etc
promo, and assortment) • Automation (eg, robotics and • Advertising
• Frequency push (eg, delivery microfulfillment)
fees, minimum order value, Digital and analytics
loyalty, and subscriptions) Delivery and last mile • Omnichannel vision and incentives
• Excellence in delivery operations • Prioritized use-case road map
User experience (UX) • Fleet and contract optimization • Digital and analytics talent
• Mobile first • Dynamic routing optimization and data platform
• Personalization • Agile, product-led ways of working
Network optimization
Marketing
Other costs • Spend mix on customer
• Overhead and organizational acquisition vs retention
efficiency • Spend mix across media
• Direct and indirect procurement
Technology
• Stable and flexible backbone
• Omnichannel architecture
Source: McKinsey Analysis

of 100 to 150 picks per hour (for picking in- can improve operating cost by two to five
store) to up to 500 to 800 picks per hour at percentage points of earnings before interest
automated stations in microfulfillment centers. and taxes (EBIT) margin or more, depending
If volume and utilization are high enough, this on the starting level. For the last mile, grocers

7 Disruption and Uncertainty – The State of Grocery Retail 2021: Europe

are optimizing vehicles, processes, and routing partnerships need to be made sooner rather
systems and are also actively steering delivery than later, as the race for capacity and
slots to shape demand to gain efficiency— partnerships is on.
often together with partners. Leading grocers
across the world are piloting solutions and Digital and analytical capabilities and
making investment decisions now, given the operating model. Retailers must deploy
long timelines for implementation. cutting-edge technology and analytics to
differentiate their value propositions and
Managing the online ensure maximum automation of their operating
systems, which requires ongoing investment
transformation
over the coming years. Grocers also need to
effectively build native digital and analytics capabilities in
To win the growth and profitability challenge their workforces and introduce agile, product-
in online grocery, retailers need to commit led organizations that work cross-functionally.
to a deliberate and transformative approach The monetization of core (data) assets or
that ensures differentiation and optimization technology adds new income streams.
of customer lifetime value as well as cost.
As discussed, three domains need to be
successfully addressed for an effective online
transformation (Exhibit 2): Online grocery is an exciting, high-growth
business field in which incumbents and
Superior value proposition and user disruptors are currently moving head-to-head
experience. Grocers need to define the right in the race to cater to increasing customer
mix of customer value proposition(s) and demand. To establish profitable business
create a superior user experience that drives models, they will need to adapt their operating
customer lifetime value across channels. systems end to end, and they need to be ready
to invest. Further transformation, technological
Operational excellence. Players need to innovation, and new partnerships are highly
ensure the most productive fulfillment and likely to emerge, as these will be drivers of
delivery of customer demand in an optimal profitable growth going forward.
network that is adapted to (future) demand
density and service levels. Decisions on

Disruption and Uncertainty – The State of Grocery Retail 2021: Europe 8