The Covid-19 crisis has fast-forwarded Europe’s e-commerce transition by four to five years, especially in food retail: In the top five markets, e-commerce penetration now ranges from between 3% to 11% of grocery sales. But we estimate that every percentage of grocery sales moving online threatens EUR13.6bn in sales and up to EUR1.9bn in profits (4% of total). More meals eaten at home and the flourishing sales of home and personal care products propelled annual grocery sales growth to +5.3% in 2020, about twice the average growth rates seen in the 2010s. The positive trend carried on in H1 2021, with sales up +2.4% despite a slowdown since March and the progressive reopening of bars and restaurants. In the same period, the use of e-commerce for groceries has skyrocketed and this is expected to continue even as the pandemic is being kept in check on the continent as consumer habits have definitely changed.
The growing penetration of e-commerce for groceries brings about two main challenges for established retail companies. First, it shakes up the competitive game by creating a new opportunity for retailers to place a greater emphasis on convenience and service vs. price competition. Companies slow or reluctant to embrace the digital transition face the risk of losing market shares. Second, it is a major threat to profitability: Online grocery sales are made at a loss irrespective of the delivery mode (click-and-collect or delivery) using the most common order-fulfillment methods. Grocery e-commerce entails higher costs because part of the service value chain (typically product picking, checkout and delivery) is transferred back from the customer to the retailer while the associated expenses are not fully passed onto service fees. Assuming an average 3.7% EBIT margin for food retailers in Europe (the weighted average of the sector in 2020), we estimate that every percentage of grocery sales moving online is threating a corresponding EUR500m in profits if online grocery margins are at zero, which is optimistic, or EUR1.2bn if they are at -5%. In a more pessimistic scenario, the profit losses could go up to EUR-1.9bn.