Online grocery isn’t broken, but common practices might be

Online grocery profitability hinges on a small number of high-impact design choices, most notably delivery fee pricing and online assortment size. Using millions of transaction-level observations from a large grocery retailer operating both online and physical stores, this analysis examines how customers trade off convenience, variety, and cost when deciding where to shop. These behavioral insights are then embedded into a prescriptive AI model to identify which online service configurations are truly profitable.

The results challenge several common practices in omnichannel retail:

• ‍Delivery fees should not be set merely to cover fulfillment costs. For retailers with a strong offline presence, delivery fees are a strategic lever that shapes channel choice rather than total demand. When delivery fees increase, many customers switch from online to in-store shopping rather than abandoning the retailer altogether. As a result, delivery fees can often be set higher than the current practice.‍
• Offering the largest possible online assortment is not always optimal. Although customers value variety, the operational complexity and fulfillment inefficiencies associated with very broad assortments can outweigh their benefits. In many cases, a more curated online assortment delivers higher profitability.

These findings come from a study on delivery fee pricing and online assortment design in omnichannel grocery retail, which I coauthored with Daniela Fernandes, Fábio Neves-Moreira, and Jan Fransoo, and which is published in the European Journal of Operational Research.

Overall, the study shows that online grocery main levers should not be optimized in isolation. For omnichannel retailers, delivery fees and assortment size are strategic decisions that determine how demand is allocated across channels and how value is created across the entire retail system.