Online Grocery Retail: Revenue Models and Environmental Impact

46 Pages Posted: 9 Nov 2014 Last revised: 18 Jul 2015

See all articles by Elena Belavina

Elena Belavina

Cornell SC Johnson College of Business

Karan Girotra

Cornell Tech; Cornell SC Johnson College of Business

Ashish Kabra

University of Maryland, College Park; Independent

Date Written: July 1, 2015

Abstract

This paper compares the financial and environmental performance of two revenue models for the online retailing of groceries: the per-order model, where customers pay for each delivery; and the subscription model, where customers pay a set fee and receive free deliveries. We build a stylized model that incorporates (i) customers with ongoing uncertain grocery needs and who choose between shopping offline or online and (ii) an online retailer that makes deliveries through a proprietary distribution network. We find that subscription incentivizes smaller and more frequent grocery orders, which reduces food waste and creates more value for the customer; the result is higher retailer revenues, lower grocery costs, and potentially higher adoption rates. These advantages are countered by greater delivery-related travel and expenses, which are moderated by area geography and routing-related scale economies. Subscription also leads to lower food waste-related emissions but to higher delivery-related emissions. Ceteris paribus, the per-order model is preferable for higher-margin retailers with higher-consumption product assortments that are sold in sparsely populated markets spread over large, irregular areas with high delivery costs. Geographic and demographic data indicate that the subscription model is almost always environmentally preferable because lower food waste emissions dominate higher delivery emissions.

Suggested Citation

Belavina, Elena and Girotra, Karan and Kabra, Ashish, Online Grocery Retail: Revenue Models and Environmental Impact (July 1, 2015). Chicago Booth Research Paper No. 14-37; INSEAD Working Paper No. 2015/06/TOM. Available at SSRN: https://ssrn.com/abstract=2520529 or http://dx.doi.org/10.2139/ssrn.2520529

Elena Belavina (Contact Author)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Karan Girotra

Cornell Tech ( email )

111 8th Avenue #302
New York, NY 10011
United States

HOME PAGE: http://www.girotra.com

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

HOME PAGE: http://www.girotra.com

Ashish Kabra

University of Maryland, College Park ( email )

College Park, MD 20742
United States
6158779203 (Phone)

Independent

No Address Available

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