With the rise of e-commerce, you might be tempted to think that the traditional grocery shop is on the way out. But is it? While certainly facing a competitive threat, bricks and mortar grocery stores also have a couple of important advantages over the pure online retailer.

  1. Margins – grocery retailing is fundamentally a low margin business making cost control critically important. Running an online business is however typically costlier, mainly due to increased distribution costs and depreciation of the capital investment needed in IT systems and logistics.
  2. Fractionalisation of costs – physical stores tend to incur a greater proportion of fixed costs, primarily due to the rents paid. This means that brick & mortar grocers can increase their profit by more from every additional dollar of revenue generated than online grocers which incur a greater proportion of variable costs.

To help overcome these challenges a pure online grocer can of course levy an annual subscription and/or add a delivery fee, but in doing so it is likely to eliminate a pool of potential customers. Given that the delivery economics however work best if drivers spend the bulk of their time bringing groceries into homes from trucks rather than driving kilometers between homes, the loss of potential customers is clearly something best avoided.

 

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