How to Profit in Online Grocery Shopping: Overcome These 5 Key Challenges

The grocery industry is undergoing a digital revolution, with 69% of grocery sales digitally influenced as of H1 2024. Yet, despite increased adoption of online grocery shopping where 76% of U.S. households now shop online, digital profitability remains a major challenge. While grocers have invested heavily in e-commerce platforms, only 51% of them achieve margins above 10% on online orders. The dissatisfaction is evident, with 83% of grocers reporting dissatisfaction with their online profitability in 2024, a slight improvement from 86% in 2021.

Why is digital profitability so elusive? This article explores the four key challenges grocers must address to profit in online grocery shopping. From managing fulfillment costs to enhancing inventory visibility, tackling these issues is essential for grocers aiming to boost margins and sustain growth in a highly competitive market.

Fulfillment Challenges

Fulfillment costs are one of the biggest profitability drains for grocers, with 83% of grocers citing picking and fulfillment expenses as their primary challenge. Unlike in-store shopping, digital grocery orders require picking, packing, and delivery all of which involve additional labor, technology, and logistics costs.

Why It’s a Challenge

High Cost of Picking and Packing: E-commerce orders require dedicated pickers to select items from shelves, pack them, and prepare them for delivery or pickup. Labor shortages and increased wages only amplify these costs.

Last-Mile Delivery: Delivering groceries to a customer's doorstep is costly, and 73% of grocers identify delivery costs as a key challenge. Rising transportation costs and inefficient delivery routes only exacerbate the issue.

Customer Expectations for Speed: Shoppers now expect same-day delivery and curbside pickup, placing pressure on grocers to meet short fulfillment windows. Missed deliveries and unpredictable delivery slots cause $1.6 billion in lost sales, according to Grocery Doppio.

What Grocers Are Doing

72% of grocers plan to invest in fulfillment platforms to automate picking, packing, and last-mile delivery.

• Companies like Walmart are shifting to store-fulfilled models to reduce the cost of last-mile delivery, with the strategy contributing to a $2.5 billion monthly run rate in Q3 2024.
• Target has also embraced a store-fulfilled model, optimizing split shipments and reducing last-mile costs, thereby improving margins.

Omnichannel Integration

The omnichannel shopping experience is no longer a "nice-to-have" but a strategic imperative for profitability. Shoppers are increasingly demanding flexibility in how and where they shop, and grocers must provide seamless transitions across in-store, online, and curbside pickup channels.

Why It’s a Challenge

Complexity of Integration: Connecting in-store, mobile, and online shopping requires advanced IT infrastructure and data integration.

Disjointed Customer Journeys: Inconsistent experiences across channels can cause frustration and customer churn, especially if cart contents or loyalty rewards don’t carry over.

Valuable Omnichannel Shoppers: Omnichannel shoppers are more profitable than single-channel customers, with an average monthly spend of $1,043 versus $857 for digital-only shoppers and $839 for in-store shoppers.

What Grocers Are Doing

69% of grocers are investing in omnichannel integration to provide unified shopping carts, shared loyalty programs, and cross-channel shopping capabilities.

• Companies like Kroger have implemented omnichannel loyalty programs that allow users to shop in-store, online, and via mobile seamlessly, ensuring consistent customer experiences.
• Walmart offers curbside pickup, online delivery, and in-store shopping under a unified system, creating one of the most comprehensive omnichannel experiences in the industry.

Inventory Visibility: Reducing Out-of-Stocks and Substitution Rates

Inventory visibility is a major pain point for grocers and a significant contributor to lost revenue. When shoppers encounter out-of-stock items, they often leave the platform altogether or refuse product substitutions.

Why It’s a Challenge

High Out-of-Stocks: Out-of-stock SKUs lead to lost sales, with grocers losing an estimated $7.4 billion in 2024 due to unavailable items.

Substitution Rejection: 27% of shoppers refuse product substitutions, further impacting profitability.

Lack of Real-Time Inventory Data: Many grocers operate with legacy systems that fail to offer real-time updates on product availability, causing 71% of grocers to cite inventory visibility as a key challenge.

What Grocers Are Doing

83% of grocers plan to overhaul back-end systems in 2025 to improve real-time inventory tracking, reduce out-of-stocks, and offer more accurate substitution recommendations.

• Kroger’s Precision Platform enhances inventory tracking and provides shoppers with visibility into available products, reducing the likelihood of cart abandonment.
• Target has optimized its inventory visibility systems to reduce substitutions, cutting 

Dependence on Third-Party Platforms

Third-party platforms like Instacart and DoorDash have helped grocers expand their reach, but the reliance on these platforms also comes with drawbacks. Grocers lose direct access to customer data, face higher commission fees, and risk losing control of the customer experience.

Why It’s a Challenge

High Commission Fees: 63% of grocers cite third-party fees as one of their biggest challenges, as these platforms charge commission fees on every order.

Loss of Customer Relationships: 89% of grocers worry that third-party platforms prevent them from owning customer relationships, with an increase of 5% since 2021.

Reduced Data Visibility: Third-party platforms control customer data, making it harder for grocers to develop personalization strategies and loyalty programs.

What Grocers Are Doing

Grocers are reducing their reliance on third-party platforms, evidenced by a 10.4% drop in third-party sales in 2024. To counteract this, grocers have increased direct-to-consumer (DTC) digital sales, which now make up 13.4% of total sales.

Achieving profitability in online grocery is no easy feat, but grocers can drive sustainable growth by tackling the four key challenges outlined above.With holiday sales projected to rise 6.3% over 2023 and 77% of shoppers expected to use digital channels to shop, now is the time for grocers to solidify their digital strategies. 

To explore these insights further, join the State of Digital 2024: A Recap of Digital Grocery Spends and Trends webinar, where industry leaders will discuss the future of grocery profitability and strategy.