Towards Profitable Growth in E-Grocery Retailing - the Role of Store and Household Density

27 Pages Posted: 17 Sep 2021 Last revised: 1 Oct 2021

See all articles by Joydeep Paul

Joydeep Paul

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Niels Agatz

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Jan C. Fransoo

Tilburg University - Tilburg University School of Economics and Management; Eindhoven University of Technology, Department of Industrial Engineering and Innovation Sciences

Date Written: September 15, 2021

Abstract

Despite the continued growth of e-grocery sales, few companies actually make any profits in this retail segment. Increasing market shares and associated drop densities may render profitable operations possible, but higher delivery fees seem essential to achieving profitability. Yet such higher fees may put e-groceries at a disadvantage as compared with the traditional store channel, which remains highly competitive. This study models customer choice between the e-grocery channel and the store channel as well as the effects of that choice on those channels’ operational costs and market shares. We identify conditions under which e-grocery retail can be profitable, and we estimate our model’s parameters using secondary industry data.
Our results indicate that e-grocery is profitable when household density is high and store density is low. When customer valuation of the e-grocery channel increases substantially, the result may be cannibalization of the store channel’s sales to the extent that stores encounter losses. Thus there are three paths to e-grocery profitability:(i) a substantial increase in the relative consumer valuation of the online channel; (ii) a focus on areas with high household density and low store density; (iii) a long-term subsidy of the online channel until stores begin to close.

Keywords: E-Grocery, Customer-choice model, channel cannibalization

Suggested Citation

Paul, Joydeep and Agatz, Niels A.H. and Fransoo, Jan C., Towards Profitable Growth in E-Grocery Retailing - the Role of Store and Household Density (September 15, 2021). ERIM Report Series Reference Forthcoming, Available at SSRN: https://ssrn.com/abstract=3924272 or http://dx.doi.org/10.2139/ssrn.3924272

Joydeep Paul

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T09-36
Rotterdam, 3000 DR
Netherlands
+31104082289 (Phone)

HOME PAGE: http://www.rsm.nl/people/joydeep-paul/

Niels A.H. Agatz (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Jan C. Fransoo

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://www.tilburguniversity.edu/staff/jan-fransoo

Eindhoven University of Technology, Department of Industrial Engineering and Innovation Sciences ( email )

P.O. Box 513
Eindhoven, 5600 MB
Netherlands

HOME PAGE: http://www.tue.nl/staff/j.c.fransoo

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