Online shopping dents profits of UK supermarkets

New research indicates that the UK’s grocery sector is likely to see a reduction in profits of nearly £250 million, due to the rise in online food shopping during the pandemic. The study, conducted by leading trade credit insurer Euler Hermes, projects that for every percentage point that e-commerce increases its share of the UK grocery market, retailers’ profits will drop by £246 million as a result of the additional costs associated with online fulfilment. E-commerce currently accounts for 12% of revenue generated by UK supermarkets, which is far higher than in other European countries. In France, online sales make up 8% of the total, while it is less than 4% in Italy, Spain and Germany. According to the report, every percentage point of grocery sales that move online in the Eurozone threatens €13.6bn in sales and up to €1.9bn in profits (4% of the total).
European food sales increased by over 5% in 2020 – twice the average annual growth rate seen since 2010 – and a further 2.4% in the first half of 2021. Euler Hermes’ forecasts account for UK retailers operating with an EBITDA model of 3.7% (European average) and 10% lower profit margins for online fulfilment. More optimistic modelling with profit margins of -5% and 0% would still see the subsector’s profits fall by £156million and £66million respectively.
Aurelien Duthoit, senior sector advisor for macroeconomic research at Euler Hermes, said:

“The UK’s already well-developed appetite for online grocery shopping has left it overexposed by the surge in household demand during the pandemic. As we head into the traditionally busy ‘golden quarter’ amid disruption and increased costs across the supply chain, it’s imperative that retailers are able to meet any further uptick in online demand efficiently. We’d also expect to see fledgling partnerships between traditional retail brands and food technology businesses continue to blossom – be that delivery specialists, dark store operators or logistics companies offering software and warehouse services.”