What’s covered in this post?
- Online grocery industry stats and players
- How online grocery business works?
- How an online grocery store makes money?
- What are the features of online grocery store?
- What are the challenges in online grocery business?
Online grocery shopping is catching up with consumers rapidly. According to a Nielson study, in developed countries like US, UK, Japan, France, etc., about one-fourth online shoppers are already shopping groceries on the internet and 55% are willing to do it in near future.
To cater this growing customer base, online grocers are also increasing at a 3x rate year-over-year. And the whole sector is growing at an impressive annual rate of 13% (even the booming online travel industry is at 9.5%).
The stats definitely look promising for new players; however, due to the perishable nature of grocery products certain challenges arise, which make running online grocery stores/marketplace more challenging than running ecommerce stores for apparels, electronics, home décor, and other such products.
In this post, we will do a critical analysis of online grocery business and cover its important aspects in the following order –business model & possible revenue models, critical website features, challenges & solutions.
How It Works? – Business Model of an Online Grocery Store
Assuming you know the basics, (which are – an online marketplace/store to sell groceries and deliver them at customers’ doorsteps) the critical aspects of an online grocery business are:
a) Tie-ups with local grocery producers/whole sellers (given you are not one yourself), and
b) Establishment of a robust delivery network to make sure orders reach customers in a timely manner
As for how this business makes you money, usually, a commission is cut by marketplace owners on each order, before transferring the payment to the grocery seller; or if you are the seller yourself, then through service charges for delivery & convenience.
How it Makes Money? – Revenue Model of Online Grocery Business
As just explained, the commission-based revenue model is pretty straight forward. However, to accelerate business growth & maximize profit margins you can implement different commission rates for different products. For that, do market research to identify:
- Most popular products
- Growth in the demand for a product
Typically, the subscription-based revenue models waive off some charges, provide discounts, or better service to customers over a period of time. For example, Instacart offers a yearly subscription for free 2-hour or scheduled deliveries. Another example, Thrive Market offers a 25-50% discount on all order with its yearly subscription. Note that you can also use both the commission & subscription-based revenue models at once.
For those online grocers who operate their business independently, (especially brick & mortar grocery sellers who are planning to go online) making money from the service charges is the most viable revenue model. They can also add the subscription based model as an additional revenue stream.
Secondary Revenue Streams
- On-site promotion for merchants/grocery sellers (applicable for marketplaces only)
- Hosting banners ads
- Start blog and publish sponsored content on it
- Sell useful merchandise such as jars, reusable carry bags, etc. (it will also help you in branding)
- Sell user data to market research firms
Which revenue model & streams will bring you maximum benefit depends on many factors, such as:
- Target market
- Business size
- Budget, age and popularity of business, etc.
So, analyze each of these options against your business goals & needs, and choose the ones that suit you the best.
Critical Website Features for Online Grocery Store
Understanding business requirements & implementing right revenue model will help you establish your online grocery startup. But it is your website that will help you interact with buyers, engage them, and turn them into loyal customers. So, it is essential that your website is quick to load, easy to use, mobile friendly, and has following unique features:
Many a time people take the same grocery items home. Keeping this common consumer behavior in mind, you should provide your customers the option to save an order to their profile, which they can re-order, instead of adding same items to the cart time & again.
Grocery shopping is often a family activity, in which different members can have different demands. So, it would be quite logical to offer a feature that allows users to share shopping cart with other registered users so that they can add additional products, and get them all delivered in one single order.
Recipes & Ingredient List
This would be like going the extra mile and will be totally worth it. Add some recipe ideas on your website and recommend them on product pages (if the product is one of the ingredients). This will definitely catch customers’ attention and might even engage them to buy more items from you.
These days, it is a common practice among businesses to send discount coupons to make the most out of seasonal sales. So it is important that your website has the feature to receive & process these discount coupons.
Offers like providing free first delivery or x% discount to customers who invite their friends to buy from you are becoming popular practice among online businesses. Not only do they encourage customers to buy more from you, but also help you keep the customer acquisition cost down.
In developed ecommerce markets, there is a trend catching up among customers to hire shoppers. These shoppers take the list from customers and do the grocery shopping online on their behalf. If you are operating in a market where customers seem inclined to that option, make sure to include it in your website feature list.
Other than these, make sure your online grocery store also have these basic, but critical features & functionalities:
Product Categories: Classify your inventory in proper categories and sub-categories and implement it on your website to make it easier for customers to find the right product.
Search Tool: If customers can’t find what they are looking for by browsing product categories, they should be able to search for it. To enhance customer experience, search tool should have the auto-suggest feature & should be error tolerant to minor spelling mistakes.
Customer Profile: Like any other ecommerce store, your registered customers should have an account where they keep a record of their orders, save items, save repeat orders, etc.
Merchant Module: If you are opening an online grocery marketplace, then you also need to work on a separate section for merchants (grocery sellers), which allows them to manage their individual inventories, orders, payment, etc.
Social Commerce Features: Features such as sharing products on social media, social signup, or selling directly on Facebook, would also help your business get a good exposure.
SEO Ready: Make sure that your website has all keys features to get easily crawled by search engine bots and to rank better. Read here about key On-page SEO tags.
Mobile Friendly: It is certain that most customers will buy from you on mobile. So make sure to enhance your store’s on-the-go purchase experience, whether you make the website responsive, built a separate mobile website, or an app.
Housing all the above-mentioned features on your online grocery store is a challenge, which definitely will take lots of time, effort, and investment. The best approach to go about this challenge is to build your grocery store with a technology solution (readymade script) that offers most of these features by default and allows you to easily add unique features.
At FATbit Technologies, we have developed a similar product called Growcer that enables entrepreneurs to instantly launch a feature-rich online grocery store. With the freedom to customize and a compelling mobile app, it offers everything that a grocery store needs to implement unique functionalities.
Now, let’s discuss the challenges you will face when running an online grocery business and their possible solutions.
Challenges Associated with Online Grocery Business
As mentioned earlier, the unique challenges this business model presents are due to nature of grocery products, which are either perishable or intended for immediate consumption. Let’s discuss the major ones in detail:
Storage & Delivery Infrastructure
Regular online stores can afford to tackle instances like delays in delivery, wrong item delivery, returns, etc. But for online grocery stores, it will be a pretty much ‘do or die’ situation. Therefore, the entire supply chain – from farms/manufacturers to storehouse & then to the customers – needs to be very robust & time-efficient.
Additionally, since perishable food products need to be stored & delivered in refrigerated chambers, storage infrastructure would add up the business operations cost marginally.
There are certain steps you need to take to combat these challenges. Some of which are:
- Integrate a robust, Just-in-time (JIT) inventory management system API with your grocery store that automates things to reduce storage cost & wastage
- Partner with a reliable delivery service provider that can meet your customers’ expectations with assurance
- Segment the delivery network into hyper-local networks to manage deliveries better & make them faster
Low Profit Margins & Quality Assurance
Today, people shop online not just for the convenience but also because they expect to get better prices. Online grocers face the same challenge of offering competitive pricing. But with too much money spent on building & maintaining the storage infrastructure & efficient supply chain, keeping satisfactory profit margins might become difficult.
Other than that, when it comes to vegetables & fruits, most customers prefer to buy only after physically checking them for their freshness & quality. When shopping online, such an option is not possible. So, to persuade customers to buy groceries online remains a persistent challenge.
There are a bunch of steps you can take to address these problems:
- Add more non-perishable categories to your store, such as packaged foods, personal care & beauty products, household items, etc. as their storage & delivery cost less
- Merge your online & offline grocery business to enhance customer experience and to cut down the operation cost wherever possible. Below we have breakdown the ways to do it:
- Customer checks product online for availability & buys them at store after confirming quality
- Customer orders online & pick up order at store (both a & b will save the delivery cost)
- Customer visits store & orders online to get groceries conveniently delivered at home
- Self-checkout at stores by using technologies like iBeacon (reduce operation cost & enhance customer experience)
Online grocery marketplaces that don’t have physical stores can launch their offline chains to benefit from the blended online-offline grocery shopping concept.
Grocery consumption is the basic human need, and people are increasingly relying on online shopping. So, online grocery business idea fits perfectly in the current dynamics, despite above-mentioned challenges.
The important thing for entrepreneurs planning to enter this sector is to be aware of these challenges & know how to go about them by leveraging right technology, trends & tactics. And that’s where this post serves as a valuable resource.