Delivery Apps and Grocery Stores May Not Be the Perfect Match

DoorDash, GrubHub, and Other Apps Make Deals With Grocery Stores

Over the past year, a number of food delivery apps inked deals with grocery stores, including DoorDash (DASH), GrubHub (GRUB), and Deliveroo, the UK company which is preparing to make its public debut in London in the coming weeks.

These apps began by specializing in delivering restaurant food, but during the pandemic they filled a need for small grocery deliveries. In some ways, this business model is perfect: People who make large weekly grocery orders often need extra milk or a spur-of-the moment ingredient, and delivery apps have fleets of workers who can get small orders to consumers’ doors in a matter of minutes. However, profitability remains a concern.

Thin Margins Make Profitability Difficult

The global grocery business is worth about $7.6 trillion per year, but grocery margins are notoriously thin. When a delivery app transports a meal for a restaurant, they usually take roughly a 30% commission. Often this still results in losses for delivery apps.

Grocery stores can only afford to pay a 15% to 20% fee to delivery companies. If consumers are mainly using these services for small purchases, like a carton of eggs or pint of ice cream, transactions are not profitable for delivery companies. At the same time, if delivery companies mark up their prices too much, consumers will probably opt to just walk to the corner store instead of ordering small grocery deliveries.

Post-Pandemic Outlook

Margins on small grocery deliveries also depend on what types of items customers order. Cheap items which are bulky and difficult to carry, such as toilet paper or bread, make logistics and profitability extra difficult. In contrast, small, high-value items like alcohol tend to be more profitable.

Though the pandemic has caused surging demand for online ordering and delivery, not all forms of ecommerce are equally profitable. As more of the population receives COVID-19 vaccines and people begin to feel comfortable going to in-person stores, ecommerce for small grocery orders may become an even more difficult business.

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