Fulfillment costs in online grocery retailing: comparing retail store and warehouse strategies

Abstract

This study develops a framework that structures the operational costs of online grocery retailing in order to identify which is the most suitable e-fulfillment strategy. The cost framework was designed by applying time-driven activity-based costing (TDABC) and is based on the insights of two large European grocery retailers, which operate retail store and warehouse e-fulfillment strategies respectively. Cost information was collected, and activity-oriented process modeling was carried out in the field to identify the most relevant e-fulfillment cost drivers. For the retail store strategy, picking costs were the highest among e-fulfillment activities and up to twice as high as for the warehouse strategy. For the warehouse strategy, delivery costs were the highest and 50% higher than for the retail store strategy. Less studied logistics activities such as unpacking and reverse logistics all together accounted for up to one third of total expenses for both strategies. In omnichannel, operations and logistics managers must still ensure the profitability of the online channel if they want to succeed in the grocery business. This framework will help managers identify and estimate the most relevant cost drivers, and to allocate them to the main operational activities.