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Offering Grocery Delivery Service Still Not Worth It to Many Companies

By James Brumley - Jun 18, 2020 at 8:29AM

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The next era of home deliveries will prioritize efficiency and profitability, which are already separating the winners from losers.

How does the old adage go? "Be careful what you wish for because you just might get it"?

Grocery store operators are now coming face-to-face with the fact that the delivery business they have been working so hard to win is costing them a fortune. More specifically, it's cutting into the profits the industry already barely generates.

That's not to suggest grocery store chains like Kroger (KR 3.28%) or Walmart (WMT 5.11%) are reporting smaller absolute bottom lines despite their top-line gains. Adding delivery options has increased net revenue, even if it hasn't contributed much in the way of absolute profit growth.

It is to say, however, that grocers are now at a point where they must start thinking more critically about the actual, long-term fiscal benefit of bringing groceries to their customers' homes.

Man holds a bag of groceries in front of a delivery van

Image source: Getty Images.

Still bleeding money, on all fronts

Cathy Morrow Roberson, founder and lead analyst of industry research firm Logistics Trends & Insights, struck directly at the transportation aspect of the matter in March. Just a few days following reports that at-home delivery company Skipcart would stop working with Walmart, she asked the rhetorical question: "How can you make money in a business based on very low labor cost?"

The only answer to her philosophical query is, you don't.

See, Skipcart's decision in February marked the fourth last-mile delivery outfit to call it quits with Walmart in just a little over a year. That list of ex-partners includes recognizable names like Uber Technologies and Lyft too, as well as smaller high-tech player Deliv. These are organizations with enough infrastructure and scale in place to at least have a fighting chance at turning a profit. Roberson added in her interview with logistics news website The Load Star that all of Walmart's now-former grocery delivery partners severed ties with the mega-retailer because the third-party delivery relationship wasn't profitable. Skipcart CEO Ben Jones' observation at the time was a bit more blunt. He flatly told Bloomberg "we're all losing money" delivering groceries to peoples' homes.

And it's not like the grocers themselves are in a position to pay these last-mile delivery drivers more. A study done by consumer research outfit Incisiv and AT&T last year determined that grocers who added delivery to their repertoire saw an average 15.8% increase in revenue within a year. Cannibalization was rare, with less than one-fifth of these retailers reporting it was a problem. These grocers aren't necessarily turning as much extra profit from those additional sales, though. Among the grocers polled, the study found that three out of five actually saw per-order profits decline thanks to the introduction of delivery service.

If nothing changes -- and the ramp-up in online grocery ordering due to the coronavirus contagion didn't likely change anything about the financial metrics of at-home delivery -- expanding the use of third-party grocery delivery services may only make grocers even less profitable.

Examples of smart maneuvering

None of this is to suggest online grocery shopping (and grocery delivery, in particular) has to be a losing proposition for any and all involved, whether it be stores, their distribution centers, online-only players like Amazon.com (AMZN 1.12%), or third-party delivery companies such as Skipcart or Deliv. The key is greater efficiency in all facets of the process. That's easier said than done, however, and will likely require a serious rethinking of how such a service should work.

Delivery outfit Shipt is one example of creative thinking. It's owned by retailer Target (TGT 4.53%) and obviously makes deliveries for goods bought online at Target.com. But Target isn't limiting Shipt's reach to Target-sold goods. Shipt will also ferry goods bought online through rival retailers such as Meijer, Winn-Dixie, and Costco (COST 1.33%). In one way, that means Target ultimately helps its competition. But it also means that it can add revenue by picking up orders at those rivals' stores that Shipt drivers may pass en route to a drop-off anyway.

Target also acquired some of the aforementioned Deliv's technology in May. It doesn't add new business, but the tech does effectively sort and bundle deliveries that will allow a driver to drop off more packages in less time.

Costco is another name that's now willing to cross competitive lines. In March it shelled out $1 billion to acquire last-mile delivery specialist Innovel, which had been doing delivery and installation work for Sears. It may not have been a perfect fit for Costco's grocery-centric business, but it does add an installation operation that could help the club-based retailer sell more large appliances.

Efficiency is the challenge -- and the key

Should Walmart and Kroger rebuild their delivery operations? Could they if they wanted to? It all remains to be seen.

What is clear, however, is that the grocery delivery angle has matured. The key players don't simply need to offer the option as a means of keeping Amazon in check at any and all costs. Grocers and similar consumer staples retailers are now being forced to ask if their existing operations are sustainable enough.

Investors in the meantime should be looking for the companies making a deliberate, well-conceived effort to improve efficiency. So far, that's Target more than any other. Walmart seems to strangely lag in this regard, losing Skipcart as a much-needed partner without nabbing Deliv's routing technology or Innovel (for little more than a song) in the meantime. As Roberson politely understated it after it lost Skipcart, "I think Walmart needs to go back and reconfigure its delivery network."

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley owns shares of AT&T. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale and Uber Technologies and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$139.37 (5.11%) $6.77
The Kroger Co. Stock Quote
The Kroger Co.
KR
$49.08 (3.28%) $1.56
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$144.78 (1.12%) $1.60
Target Corporation Stock Quote
Target Corporation
TGT
$180.12 (4.53%) $7.81
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$553.02 (1.33%) $7.27

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