The Economics of Grocery Curbside PickupJune 16th, 2011 | Posted by in Uncategorized
Washington D.C. – Is grocery moving online? BusinessWeek reported earlier that Walmart is said to be experimenting with online grocery delivery. At the same time, many supermarket chains are expanding their grocery curbside pickup services. SuperMarket News is reporting that Harris Teeter is slashing its shop-online-pickup-groceries-curbside-at-the-store fee from $4.95 to $1.95. At $1.95, the fee likely only covers the cost of processing the online payment for Harris Teeter. At the same time other grocers are actively testing the curbside pickup options at their stores as well. Why do it?
Benefits and costs
According to the annual report, a typical Harris Teeter store averages about $400K in sales and $119K in gross profit every week, as Harris Teeter earns a pretty typical for grocery industry 30% gross margin rate. Assuming an average shopper basket of $35, in an average week a store draws in about 11.3K customers, each bringing in about $10.50 in gross margin (again, using the 30% margin rate). But online orders that are picked up at the store are likely much larger than $35 per basket. Often seen as a convenient alternative to stocking up at warehouse retailers (Costco, Sam’s Club), and cheaper than grocery home delivery, these baskets are likely 3 to 5 larger than average. In other words, the curbside pickup customers average closer to anywhere from $105 in sales & $31.50 in margin (3x larger than average) to $175 in sales & $52.50 in gross margin (5x larger than average).
It probably takes anywhere from 25 (for $105 baskets) to 40 minutes (for $175 baskets) for in-store personnel to assemble the ordered items, bag them and deliver them curbside for customer pickup. Ignoring for a minute other expenses such as installation of the required technology to process online orders for curbside pickup, handling of payments for customers who are pulling into the parking lot to pick up their groceries, to name just a few, 25-40 minutes of clerk time translates into $5-$8 in labor costs (assuming a $12/hour average for a clerk position).
So, to review, the online-ordered baskets average $31.50 to $52.50 in gross margin, and it costs Harris Teeter $5-$8 to pick them. So, net benefit is anywhere from $26.50 to $44.50, right? Not exactly!
The key question is how much incremental spend does curbside pickup generate for Harris Teeter. Incrementality here can be thought of as consisting of two drivers:
- Does curbside pickup drive increased basket size? In other words, is Harris Teeter getting shoppers to spend more money because it offers the curbside pickup service, net of any demand-pulled-forward effects?
- Does curbside pickup drive additional trips? Said another way, is Harris Teeter getting shoppers to consolidate their trips and come to Harris Teeter only instead of splitting their share of wallet across multiple supermarkets?
This is where it gets really tricky:
- If all curbside sales are incremental, the benefit clearly outweighs the costs. This extreme assumes that all curbside sales wouldn’t have happened at all if Harris Teeter didn’t offer the curbside pickup service.
- On the other hand, if none of the curbside sales are incremental, then Harris Teeter is paying for someone else to pick your groceries for you. Customer satisfaction improvement notwithstanding, this would be a very expensive way to provide convenience.
Which is the right answer? How much is truly incremental? Does Harris Teeter actually drive over 15% lift in baskets that are being picked up curbside to break even on the curbside pickup service?
Test vs. control measurement
This may sound like a simple analytical task. However, measuring small changes in sales at a store is much more complex than counting the number of curbside pickup orders. The complication is rooted in the nature of store sales. Daily sales vary by over 100% in any given week. The only way to know for sure is to test the service in some locations but not others, and then measure the incremental change from before to after vs. a carefully matched control group. Only by carefully matching test stores to representative groups of control peer stores can one reduce noise from daily operations, and measure the attributable impact of the curbside pickup initiative.
Results should then be segmented to understand:
- Is curbside pickup more effective at growing basket size or creating incremental transactions?
- Is it driving lift in some departments and product categories more than others?
- Is curbside more effective with some customers than others?
- Should it be deployed only to some stores (or markets) but not others?
With a wide array of investment opportunities, grocers need a consistent and accurate measurement system that can be used across capital programs, to ensure that capital is allocated to initiatives with the highest return on investment. Sophisticated analytics along with a scalable, repeatable process for accurately measuring the impact of any in-store initiative are key for making the right decisions, curbside pickup service being but one example.
APT’s Test & Learn process brings highly specialized techniques to bear on the problem of reducing noise and finding the true attributable impact – the “signal” – of the activity under examination. Learn more by reading our white paper on maximizing returns for grocery investments.