Making an online delivery service for fresh food profitable

The ongoing Coronavirus pandemic has changed a wide range of things when it comes to how we live our lives, including how we order food, and many businesses are seeking assistance when it comes to making an online delivery service for fresh food profitable.

After all, when customers are forced to queue up outside before even being allowed in-store – and when many customers may need to self-isolate at home anyway – online grocery shopping offers convenience and peace of mind.

Operators such as Le.Shop.ch, Lieferladen.de or Bringmeister have been showing for many years how a delivery service for fresh food can work successfully. e-commerce, especially in the food sector, is booming like never before. In some German cities, demand has risen enormously, so that food delivery services have registered up to 500% more new customers.

Nevertheless, for a new player to enter the market, the challenges can seem vast. How does an online food delivery service actually work and what are the calculations that businesses need to make? Is it actually possible to make online delivery for fresh food profitable?

We think the answer is a resounding ‘yes’. Here’s how.

Online or multi-channel?

In these unusual times there has been an increase in the  the population's demand for goods for daily use, especially food, increases. In order to avoid the long queues in front of supermarkets, many customers switch to online supermarkets and have the ordered goods comfortably delivered to their homes. Operators such as Le.Shop.ch, Lieferladen.de or Bringmeister have been showing for many years how a delivery service for fresh food can work successfully. 

Nevertheless, many food retailers have their doubts. One argument that has been mentioned again and again, at least in the past, is the question of whether it is possible to earn money with a delivery service at all? In this article we deal with this question and give answers with concrete figures from about ten years of experience with the online supermarket Lieferladen.de.

Picking and Packing in the supermarket

However, the process of picking and packing needs careful management. Regular customers should not be disturbed in the supermarket while the staff are picking online orders. Furthermore, the process must be as smooth and straightforward as possible for those staff.

These twin needs inspired the development of the wave picking method, which uses software to definesfixed order and delivery cycles. All customer orders are then picked and collected in the supermarket at the same time – and a time which specifically causes as little customer disruption as possible.

Wave picking is fast and very efficient – which it needs to be when working with fresh food. Packing needs to, for example, separate chilled and frozen products from ambient ones, and pack foods in a logical order to avoid damaging more sensitive or fragile products. This ordering – with heavy and non-sensitive products at the bottom, sensitive products at the top – must be specified by the same software, this time using a different algorithm to the one used for wave picking.

Selling by weight

Fresh products of the kind you find at a delicatessen counter or in a specialist food shop can make online food shopping and delivery truly special – but they introduce challenges of their own. Online grocers selling food in this way need to be able to price them by weight, and deal with potential discrepancies between the weight entered by the customer online, and the final weight in their order. This again requires high-quality, specialist ecommerce software.

The last mile as "problem child"?

Once all the food has been efficiently picked, expertly cut and properly packed, the final challenge is getting it to the customer promptly and cost-effectively, with all their shopping fresh and protected.

This requires online grocers to offer delivery areas and time slots according to postcodes, and to think carefully about how frequently certain areas can be reached. Areas near the supermarket might be delivered to daily, whereas areas further afield might be better served with weekly slots. As with the wave picking process, order and delivery cycles can be planned with the help of software, which can also help to save energy by planning the most efficient routes.

Flat delivery rates are best, with studies indicating that customers are willing to pay about €5 per delivery. However, delivery will tend to cost more than this flat-rate delivery fee.

Calculation for a food delivery service

But how exactly are costs and profits for online grocery calculated? The figures used here and the resulting calculation are based on the real experience of the online supermarket Lieferladen.de in Stuttgart, which was founded in 2010.

There can, of course be deviations for every food retailer, depending on factors such as product range, pricing, labour costs and the organisation of the supermarket. However, these figures should provide a broad guide for other online food businesses.

Profits

The average shopping cart at Lieferladen.de, excluding value added tax, is usually around €65. This has risen to around €75 since the coronavirus pandemic.

This corresponds to about €81 gross, because the average VAT rate is about 8%. With a share of fresh food of about 70%, the average gross margin is about 27%. The delivery flat rate is graded according to the size of the delivery time window and is generally between €3.90 and €7.90, resulting in an average of approximately €4.90. This has recently levelled off at around 5 €, meaning that the gross margin on each order is therefore around €25.25.

Logistic costs

Our calculations place wage costs at €13. The number of orders picked during a wave picking hour can increase on particularly good days and be much higher than the 20 per hour here. Generally, the picking rate is between five and six orders per hour and picker.

Deliveries per hour depend enormously on the number of orders per day and the density at the time of delivery. Over a long-term average, with a very conservative calculation, about three stops per hour were possible, but since the coronavirus pandemic took hold and new software was installed for route planning, 3.75 stops per hour have been achieved. For deliveries, Lieferladen.de uses refrigerated vans, which cost about €500 per month and about 25 cents per kilometre to run.

Emporix charges 3% of online sales for the use of the software at the beginning. This figure drops significantly with higher sales.

Calculation

If you now add the profits and costs to the table below, it quickly becomes clear that a delivery service for fresh food can be operated profitably even with a relatively low number of orders.

Changes due to the Corona crisis

Ultimately, then, we can see that several key parameters determine whether a good delivery service can be run profitably. First, a supermarket must already exist – that is, there must be no need for the setup of a whole new warehouse. Second, software must be used to optimise the picking and packing processes, as well as route planning and deliveries.

We have not examined here the need for dedicated personnel for maintaining product data and promoting the online delivery service, no costs incurred by the physical store but not the delivery service, such as cashiers and doormen.

Running a profitable food delivery service can be challenging, but it is well within the reach of many businesses. And with the coronavirus pandemic generating wholescale changes in consumer habits, it could be a shift which is well worth making.

Contact us today, so that you can offer your delivery service too!