Reasons to Rethink the Online Grocery Business Model

Online grocery is a business model that seems to be exploding. In recent years, national grocery chains have launched both delivery and pickup services, and nongrocery brands have entered the grocery market. For example, Amazon.com has plans to launch a chain of grocery stores by the end of 2019 starting in Los Angeles.

In addition to grocery delivery, meal delivery services are also on the rise. More than ever, people are short on time, and love the idea of having meals delivered to their door.

Although business in the grocery delivery market seems to be doing well, looks can be deceiving. Multiple studies have shown people prefer shopping in a brick-and-mortar grocery store, a fact that has Amazon struggling with its grocery delivery model. However, some companies seem to be doing well with grocery delivery. What’s going on?

Why Would a National Brand Fail at Grocery Delivery?

Amazon tried for 10 years to gain traction with grocery delivery and failed, while Walmart, Kroger, and Target have all been successful. Why are some retailers able to make online grocery work, while others fail? In 2018, online grocery shopping sales in the U.S. reached $17.5 billion. There’s no denying online grocery shopping is popular with consumers, but unfortunately, it’s not a profitable business model.

The Trouble With Online Grocery Shopping as a Business Model

There are three main problems with online grocery: it’s not a personal experience, it’s more expensive, and it provides a limited frame of reference. “Consumers can only see a few products on [the] computer screen at a time when ordering online,” Kurt Jetta told "CBS Sunday Morning." “[they] have a harder time doing product selection and price comparisons. Consumers can make these same comparisons faster and easier when standing in front of a shelf.”

No matter how good a web developer is, it’s impossible to mimic the ease of browsing the aisles in a brick-and-mortar store. Many people prefer a tangible, hands-on approach to grocery shopping that involves checking prices and ingredients at the same time. You can’t do that quickly on a website.

While some experts claim online grocery will continue to grow in the future, there are signs that may not be the case. The rise of meal delivery subscriptions seems like it supports a favorable future for online grocery shopping, but even that model is changing.

Meal Subscriptions Have Found Their Way Into Physical Stores

Subscription meal kits were supposed to disrupt the grocery retail industry, and instead have become part of it.

In 2018, Kroger purchased Home Chef and sells the meal kits in its stores, and people are buying them. Walgreens – a drug store – offers meal kits from Hello Fresh. Other popular meal kits will need to get into stores if they want to survive. Blue Apron, for example, is struggling and is not currently available in stores. The company tried to sell its meal kits at Costco, but for unknown reasons it didn’t work out.

According to the March 2019 Nielson report, meal kits purchased from grocery stores totaled $93 million in 2018. Meal kit users increased by 36 percent between 2018 and 2019. People love the convenience of meal kits, but still find it more convenient to purchase them in brick-and-mortar grocery stores.

Grocery Delivery Might Be a Fizzling Fad

If you’re in the grocery business, it’s worth pausing before jumping on the bandwagon and rolling out a delivery or pickup service. Major retailers like Kroger and Target can afford to test the market even if it means losing money in the end. The explosion of grocery delivery services doesn’t necessarily mean the strategy is a success. A company might run failing experiments for a few years before giving up. Remember, Amazon tried to make grocery delivery work for 10 years before purchasing Whole Foods for $13.7 billion in 2017.

Delivery and Pickup Are a Supplement to an Existing Business Model

The takeaway is that grocery delivery and pickup services are a good supplement to an existing business model. There will always be people who need curbside pickup and delivery, but those consumers aren’t the majority. If you’re going to launch a delivery or pickup service, make sure it supplements an existing business model and isn’t an attempt to replace your brick-and-mortar store.

Anna Johansson is a freelance writer with a special passion for entrepreneurial and marketing-related topics.