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Another Delivery Partner Abandons Walmart: A Cautionary Tale of Outsourced Grocery Delivery

By James Brumley - Feb 26, 2020 at 1:02PM

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It's increasingly looking as if in-house services are required to make delivery of perishables a viable venture.

Last week, grocery delivery company Skipcart told Walmart (WMT 0.45%) it wouldn't be able to continue ferrying Walmart's groceries to its customers at 126 stores in 32 states.

The news wasn't that remarkable, save for two details. One, Skipcart had been partnered with Walmart for less than a year before it backed out of the relationship, and two, Skipcart is the fourth company to stop delivering groceries for the world's biggest retailer.

On the surface, it's easy to assume Walmart is the stumbling block. Rival (AMZN -0.40%) delivers groceries, and, with the help of its shopping and home delivery company Shipt, Target (TGT 0.36%) does as well. Skipcart's decision, however, is more of an indictment of the whole idea of same-day delivery of perishables than an indictment of Walmart's logistics headaches. Investors counting on home deliveries as a differentiating force when selecting a stock may want to rethink how long grocers can continue subsidizing delivery without a major margin improvement taking shape somewhere else.

Photograph of gocery delivery boy in front of delivert van, with sack of fresh produce

Image source: Getty Images.

Finally admitting to a cost impasse

Consumers are buying groceries online -- clearly -- to the tune of about $30 billion in annual spending in the United States. Invesp, a company that manages e-commerce for websites, projects that figure will reach just under $60 billion by 2023.

Delivery is also appealing to consumers. Industry research outfit Brick Meets Click estimates that 28% of groceries ordered online are picked up at the store. Another 22% are delivered to a home by a courier, while the remaining 50% are shipped to a consumer via a more conventional delivery service like FedEx or UPS.

It's the latter two data nuggets that are proving to be more of a problem than almost anyone expected. Fragile foods and items that must be kept cold don't lend themselves to large-scale freight delivery, but contracted same-day delivery service providers aren't able to charge enough to remain viable. We know this because Skipcart's CEO, Ben Jones, said as much, when he lamented, "The grocery model does not work. It doesn't work today, and it's not going to work six months from now. We're all losing money."

Charging more won't work either. A little over a year ago, business consulting company Capgemini released a study showing that only 1% of online shoppers would be willing to regularly cover the full cost of delivery to their homes. The survey suggests most shoppers feel it's up to the retailer to absorb at least some of that cost, if not most of it.

More scale is the key ... a lot more

There's a bright spot buried in Capgemini's data. Three-out-of-four consumers say they're willing to spend more on the products as a means of keeping their delivery costs low or free. That's fine, as grocers are always looking for more and bigger orders anyway. They're even looking to develop entire ecosystems along the lines of what Amazon does because omnichannel customers who use all selling venues tend to spend more overall when they shop online or in the store.

In other words, scale helps in multiple ways, and could eventually offset new shipping and handling expenses.

But, there's the rub. There's just not enough scale when it comes to delivering the tough-to-handle items like fruit, milk, ice cream, or eggs. As big as online grocery shopping has become, it still accounts for only 6% of the nation's total grocery spending, and only about one-fourth of that is handled by in-house couriers like Target's Shipt or outsourced couriers like Skipcart. It's just not enough to make each round trip from a store or distribution center a cost-effective one. Particularly problematic is the so-called "last mile" to a shopper's home, which often lies outside of well-trafficked thoroughfares.

At some point there may be enough scale for Walmart and Skipcart to team up again. That point, however, isn't on the visible horizon.

Winners and losers

For better or worse, delivering groceries is still such a small part of any grocer's business, it's not going to make or break any name. There are still some clear winners and losers within the delivery game, however.

The big winner here so far is Target, which not only owns Shipt but also handles delivery work for rivals like Costco and CVS. Not only does it not have to pay for Shipt's operating margins -- Shipt by itself may well cost more to run than it takes in -- it maintains total in-house control of how the service is managed. CVS and Costco are even subsidizing their rival's same-day delivery service. Noteworthy is that Target is essentially tied with Walmart in terms of how much of the average consumer's grocery spending is done online with their respective companies (about 35%). That's a rather telling statistic because Walmart (as a grocer) has a much deeper reach and wider selection than Target.

As for a loser in all this, that's Walmart. It saw the most growth in the number of online grocery shoppers using its platform last year, while Amazon seemingly lost grocery market share. With its delivery partners dropping like flies, though, and without a homegrown alternative like Shipt, it's not clear how long the retailer will remain interested in revving this growth engine.

It matters to investors just because much of Walmart's growth proposition has focused on grocery deliveries it's increasingly struggling to do. An internal delivery arm may be the only viable, long-term option for the retailer.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and FedEx. The Motley Fool recommends Costco Wholesale and CVS Health. The Motley Fool has a disclosure policy.

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