What: J Sainsbury plans to close its London online fulfilment centre

Why it is important: what will happen to grocery boosted sales when the world goes back to normal?

Even as grocery sales soared, J Sainsbury, the UK’s second largest grocer, plans to close its London online fulfilment centre and redeploy most of the 650 employees to supermarkets.

As economies reopen, grocers face renewed competition from restaurants. Consultants Bain predict that US supermarkets could give back half of the 10% total sales growth they experienced in 2020. “The boundary is blurring between grocery and food service. What matters is not the market share in groceries but in food. Covid has given groceries a few years of reprieve and boosted sales. But when the world goes back to normal, how do they keep that surge?” asks Marc-André Kamel, leader of Bain’s global retail group.

This puts the onus on supermarkets to make their revenue more profitable. Grocery is a low-margin business and the dynamics online are even worse because customers don’t pay the full cost of picking and delivery. Bain estimates companies lose between 7 and 15% on every order, depending of their fulfilment system.

The most cost-effective method involves smaller, automated warehouses, often attached to a store. That explains Sainsbury’s plans to cut delivery distances and share staff and inventory costs. This strategy is at play in China, where Alibaba’s Freshippo builds physical grocery stores that are optimised for delivery. In the US, Walmart is testing ways to use its stores to compete better with Amazon. Even the UK’s Ocado, which pioneered automated delivery warehouses, now opens “mini” and “micro” fulfilment centres that could fit inside an existing store.

On the delivery end, some chains are trying to drive down costs by outsourcing to third-party shoppers via apps such as Instacart. Others urge customers to order goods online and pick them up kerbside.

But none of this addresses the other challenge of online shopping. Apps cannot replicate a physical visitor’s ability to scan a shelf, make substitutions and, crucially, discover things they didn’t know they wanted. That makes shoppers unhappy: only 13 to 16% who tried online grocery in France, Italy and Germany last year were “very satisfied”, a McKinsey survey found.

It also limits grocers’ ability to attract the promotional spending and rebates from suppliers that are a key part of supermarket economics. Here lies the opportunity. Online shopping generates far more specific data about who is buying what than loyalty cards. This can be used to reshape supplier relationships and improve stock management for stores as well as warehouses. Neil Saunders of research firm GlobalData estimates that 20% of items generate 80% of sales. Localised data could save space and cut food waste, making it easier to earn rebates, promote items and offer samples.

Stores still matter when it comes to online groceries