Grocers Drop Online Markups to Turn Delivery Into a Habit

A grocery retailer can collect an extra dollar by marking up an online order, or it can give up that dollar and try to win more of the household’s grocery budget.

Amid the volatile economic climate, more grocers may be inclined to test the second proposition, a change that could alter how the sector measures the economics of delivery.

Instacart said last week that Grocery Outlet, Strack & Van Til and Super King Markets have eliminated online item markups nationwide. Instacart CEO Chris Rogers said retailers offering no markups are producing “faster growth and stronger customer retention.”

A retailer that eliminates a markup gives up revenue it can see on today’s order. The economic case works only if doing so changes what happens afterward, like if the customer orders more often, puts more into the basket, buys a membership, accepts a delivery fee, or becomes valuable enough to advertisers and consumer brands that revenue arrives from another source, which are positive byproducts of retention. In other words, the unit of value begins to move from the order toward the customer.

The PYMNTS Intelligence report “The New Checkout: Crimped Consumers Lean Into Online Retail and Digital Wallets” provided a reason grocers might be willing to make that exchange. Consumers under high financial stress are 6 percentage points more likely to buy groceries online than those experiencing low stress.

The figures complicate the idea that delivery is principally an indulgence for consumers with money to spare. Some financially pressed consumers are using digital grocery more, while spending about 15% more per transaction than consumers experiencing less stress. One possible explanation is consolidation. Consumers may be planning purchases more carefully and concentrating spending into fewer transactions.

That behavior can materially change delivery economics. Fulfillment has costs attached to every order, so a larger basket can distribute those costs across more merchandise. A retailer that loses several dollars of markup but gains a larger basket, another monthly order or both has changed the revenue calculation without raising the price of an individual product.

The stakes are larger because grocery pressure is broad. Among millennials, the share reporting difficulty with grocery and household essentials rose from 79% in October to 90% in January. Among Generation Z consumers, it rose from 71% to 80%.

From Order Margin to Customer Economics

Removing the markup does not make picking, packing and delivering groceries cheaper, but it does change how those costs must be recovered.

Start with frequency. Grocery differs from much of retail because the same household needs to replenish many of the same products every week. A retailer that makes digital pricing competitive with its stores has a chance to convert an occasional convenience order into habitual spending. Memberships become more useful under that model. Rather than collecting a premium on every carton, package and bottle, the retailer or platform can collect recurring revenue while using delivery benefits to encourage additional orders. The economic test changes from the margin on one basket to revenue and gross profit generated over the membership period.

Fees occupy a more difficult position. They recover fulfillment costs directly, but consumers still see them at checkout. Shifting a $6 premium from item prices to a $6 fee does little to solve affordability. The more durable model depends on enough additional volume and ancillary revenue to reduce how much must be collected from the shopper on each transaction.

That approach is already visible in the broader retail economics surrounding some retail juggernauts. Walmart’s retail operations support an expanding system encompassing advertising, product discovery, pricing, payments and delivery, for example. Its commerce media operation can connect advertising exposure with subsequent shopping activity, making the transaction valuable beyond the merchandise margin itself.

Price remains the gatekeeper. The PYMNTS Intelligence report found that 56% of financially stressed online grocery shoppers made their latest purchase at Walmart, compared with 50% of low-stress shoppers. In stores, Walmart captured 37% of high-stress grocery shoppers versus 26% of low-stress consumers.

The connection across the findings is the economic story. Consumers under pressure still buy groceries online and can bring substantial baskets with them, but they are also gravitating toward merchants associated with value. Retailers that preserve a conspicuous digital markup risk losing the very volume required to make delivery more efficient.

Cutting that markup reverses the wager. The retailer sacrifices revenue on today’s basket to pursue more baskets, larger baskets and a longer relationship, then seeks additional returns from memberships, fulfillment fees and advertising.