Online grocery retailing is a potentially trillion-dollar market that few players have been able to crack, making it perhaps the biggest unexploited industry around. Early innovators like Webvan scared off competition with their failures, and today’s players have yet to prove whether subscription services or pay-per-use set-ups are the best for long-term growth.
Now, new research identifies the business models that optimize profits for online fresh grocers in a variety of scenarios. Chicago Booth’s Elena Belavina and INSEAD’s Karan Girotra and Ashish Kabra built a stylized model to compare the two most popular business models for online grocery retailing: subscription services, which charge a flat (usually monthly or annual) fee for deliveries, and a pay-per-order model that charges a fee with each delivery.
Their working paper finds that geography and demographics are important in determining which model will lead to higher profits. Generally, charging customers a flat subscription fee yields higher profits in small, dense, circular markets like Paris and Beijing, according to the study. Charging a fee for each delivery was more profitable in elongated markets, like Manhattan, or sparse or large markets like Los Angeles. However, the types of goods sold, such as high-margin items, can change the most profitable model for the seller.
The study also looked at environmental effects of the different models. Proponents of online grocery shopping say it can both reduce the amount of food consumers throw out (waste), and cut carbon emissions by reducing the number of car trips consumers make to the grocery store. The study found that generally, the per-order model associated with higher food waste and the subscriptions model associated with higher travel. Surprisingly though, the study found that subscriptions encouraged a pattern of buying that reduces the amount of food waste, which reduces total grocery sales and makes subscription services more environmentally-friendly.
Elena Belavina, Karan Girotra, and Ashish Kabra, “Online Fresh Grocery Retail: A La Carte or Buffet?” Working paper, November 2014.