Deliveries hit the ‘Big 4’ supermarkets for £500m

They lose £5 to £7 on every order – and price war squeezes profits

THE soaring popularity of grocery delivery has left a £500 million black hole in the profits of Britain’s biggest supermarkets which will worsen as more shoppers use the service.

Dan Murphy, a partner at global retail consultants Kurt Salmon, is warning that supermarkets are caught in an ‘Emperor’s new clothes’ scenario and have ‘blinded themselves to the reality’ of the loss-making nature of food delivery.

‘They lose between £5 and £7 on every order and the more orders they attract and more it grows the more they lose,’ he said.

Murphy said retailers were aiming to boost their online delivery businesses in an attempt to justify the plan in the long term. But he warned profitability could never match that of customers visiting stores unless delivery charges rose significantly.

‘The big supermarkets are trying to convince themselves that this is the right thing to do,’ he said. ‘They’re all completely convinced that they have got to make it work.’

The overall costs of delivery have been escalating as volumes have risen. At the same time profits have been squeezed by a price war with the German discounters Aldi and Lidl, which has shaved margins and left the delivery model under even more pressure.

An estimated 90 per cent of internet food orders at the ‘Big 4’ supermarkets – Tesco, Sainsbury’s, Asda and Morrisons – are painstakingly picked by hand in store and delivered in refrigerated vans.

Murphy said the process is time-consuming since most supermarkets are laid out specifically ‘to encourage you to visit every corner of the store so it takes twice as long as it should do’.

He said he had upwardly revised previous calculations for online delivery losses of around £300million made last year.

Few in the industry are said to be prepared to admit the crippling pain they are bearing. Delivery costs are even hidden between departments in the same company and many associated expenses – including running websites and call centres – are often omitted from internal calculations as supermarkets try to justify the logic of delivery.

Murphy said: ‘You are selling tenners for a fiver but you’re convinced that if only you can sell enough, at some point it will become profitable.’

In a rare admission last year, Sainsbury’s online director Robbie Feather said supermarkets had ‘destroyed’ the value in grocery deliveries by undercharging.

Murphy said the impending arrival of Amazon Fresh would be ‘the nuclear button’ for delivery as it does not have to be profitable. He added: ‘They are about building a critical mass of customers and then they make money from Amazon web services and services they offer to other retailers.’