Supermarket Delivery and the Profitability Puzzle

Supermarket home delivery looks like a convenience feature. Economically, it is a margin experiment layered onto one of the lowest-margin industries in the world. Grocery retail typically operates on thin net margins, often between two and five percent. Introducing delivery inserts additional costs — picking labour, fuel, routing software, packaging, failed deliveries — into a system already optimised for cost control. The question is not whether customers value delivery. The question is whether delivery can be made structurally profitable.

There are two dominant models. The first is the integrated supermarket model: retailers such as Tesco in the UK, Walmart in the US, or Aeon in Japan operate delivery as an extension of their existing store network. Orders are picked either from stores or from dedicated fulfilment centres. The second is the marketplace-intermediary model: platforms such as Deliveroo, Instacart, or GrabMart aggregate demand and partner with supermarkets, charging commissions and delivery fees. Each model distributes cost and margin differently.

In the integrated model, the supermarket retains control over the customer relationship and pricing. Tesco’s delivery system relies on scale and routing density. Orders are grouped geographically, and delivery windows are structured to maximise van utilisation. The retailer can cross-subsidise delivery through basket size: online shoppers often spend more per order than in-store customers. The economics depend heavily on average basket value. A £120 weekly shop absorbs delivery costs more easily than a £20 top-up. Subscription models such as “Delivery Saver” further stabilise revenue and encourage repeat behaviour.

Yet even in integrated systems, profitability is not guaranteed. Picking from stores can disrupt in-store operations and requires labour dedicated to assembling orders. Dedicated “dark stores” or automated fulfilment centres improve efficiency but require capital investment. Profitability hinges on order density, labour productivity, and fuel optimisation. During the pandemic, volume surged and temporarily masked structural weaknesses. As in-store shopping returned, many retailers faced the challenge of maintaining online capacity without eroding margins.

The intermediary model shifts some costs but introduces others. Deliveroo or Instacart do not own inventory. They monetise convenience by charging supermarkets commission fees and customers service charges. This model reduces capital intensity for the platform but compresses supermarket margins. A retailer paying double-digit commission on already thin margins must either raise prices, accept lower profitability, or treat delivery as marketing spend. For small supermarkets, platform partnerships can expand reach without building their own logistics fleet, but dependence on platform algorithms and pricing structures creates vulnerability.

Speed also alters economics. Rapid grocery delivery — the 10- to 30-minute promise pioneered by platforms in Europe and parts of Asia — relies on micro-fulfilment hubs and dense urban populations. The promise is built on high-frequency, low-basket transactions. Profitability becomes even more challenging because small baskets magnify delivery cost per item. Many rapid-delivery startups expanded aggressively in 2020–2021, only to retrench when venture funding tightened. The unit economics were fragile: customer acquisition costs, rider payments, and spoilage risk outweighed margin gains in most markets.

Geography matters profoundly. In dense Asian cities such as Singapore, Seoul or Shanghai, high population concentration improves route efficiency. Short travel distances reduce fuel and time cost per drop. Integrated digital payment systems and high smartphone penetration lower transaction friction. In contrast, suburban or rural markets face longer distances and lower order density, making delivery structurally less efficient. US supermarkets, for example, contend with car-dependent geography that increases last-mile cost.

In parts of Africa, platforms like Jumia have adapted delivery to local constraints. Cash-on-delivery remains common in certain markets where digital trust is still developing. Infrastructure variability — road quality, addressing systems, traffic unpredictability — raises delivery complexity. For grocery specifically, informal retail networks and open markets compete strongly with formal supermarket delivery. The economics shift again: delivery may target urban middle classes in Lagos, Nairobi or Accra, while informal retail remains dominant for daily purchases. The model must align with income distribution and infrastructure reliability.

There is also a basket-composition effect. Online shoppers are more likely to purchase bulky or staple items — bottled water, cleaning products, pantry goods — which are logistically heavier but operationally predictable. Fresh produce and meat introduce quality-control risk. Substitution policies for unavailable items affect customer satisfaction and operational cost. Retailers must manage spoilage and accuracy carefully, as delivery errors erode trust faster than in-store mistakes.

Subscription economics are increasingly central. Tesco, Amazon Fresh, Walmart+ and others bundle grocery delivery with loyalty programmes or broader ecosystems. The subscription fee provides predictable revenue and locks customers into habitual use. From a profitability standpoint, subscription models are risk-management tools. They smooth demand and reduce churn. However, they require scale. A supermarket without sufficient volume may struggle to justify subscription discounts.

Environmental pressure adds complexity. Delivery fleets increase emissions unless electrified. Packaging waste rises with online orders. Retailers investing in electric vans, route optimisation software and recyclable materials incur additional costs that must be absorbed or passed on. In cities introducing congestion charges or emissions zones, last-mile logistics costs rise further. Sustainability commitments intersect directly with margin management.

Small independent supermarkets face a different calculus. For them, partnering with platforms like Deliveroo can provide incremental revenue without fleet investment. Yet commission rates can exceed 20 percent in some arrangements. On low-margin grocery items, this can eliminate profit entirely. Many small retailers therefore use delivery selectively — focusing on prepared foods, higher-margin specialty goods, or neighbourhood loyalty rather than full-range grocery fulfilment.

Globally, the profitability equation depends on three structural levers: order density, basket size and labour efficiency. Increase density and cost per drop falls. Increase basket size and margin coverage improves. Improve picking automation and labour cost declines. Retailers investing in robotics and AI-driven route planning aim to stabilise these variables. Yet no technology fully eliminates the last-mile cost, which remains the most expensive component of the chain.

The deeper strategic question is whether delivery is a profit centre or a defensive necessity. As consumer expectations shift toward convenience, supermarkets may accept lower margins online to prevent customer migration to competitors. Delivery can function as customer retention infrastructure rather than standalone profit engine. In that case, profitability must be measured at the customer lifetime level, not per order.

Supermarket delivery sits at the intersection of infrastructure, consumer behaviour and competitive pressure. Integrated models like Tesco’s seek to internalise margin and control experience. Platform models like Deliveroo monetise speed and aggregation, shifting economics through commissions and service fees. In Asia’s dense cities, structural efficiency improves viability. In parts of Africa, hybrid logistics adapt to uneven infrastructure. Everywhere, the underlying tension remains: grocery is a low-margin business trying to absorb high-cost logistics.

The future of supermarket delivery will likely consolidate around scale players capable of absorbing thin margins and investing in automation. Smaller operators may survive through niche positioning or platform partnerships. Delivery is no longer an experiment. It is a structural layer of modern retail. Whether it becomes sustainably profitable depends not on demand — which clearly exists — but on the relentless optimisation of cost per drop in a business that never had margin to spare.