Waste less food and create less methane gas at the landfill. A laudable goal that requires major changes in consumer behavior. Thankfully, it seems the Internet can help. Online grocery delivery has the potential to lower the amount of food we throw away. But only if retailers and delivery companies create the incentive for customers to buy fewer groceries! Socially responsible investors need to voice their support for grocery models that align profitability and greenhouse gas (GHG) emissions reductions.
Growing Fast But Slow
Online grocery sales are growing quickly in many parts of the world, but that’s off of a tiny base. Market penetration rates are inching up slowly — the online channel accounts for just 4% of grocery sales in the U.S.
Online grocery shopping is still notably expensive compared with shopping in the store. Delivery costs per trip are high, though are steadily falling as more consumers make at least some of their purchases online. The actual shopping of your grocery list is a more intractable issue.
The potential productivity gains from outsourcing the collection of groceries into a basket just aren’t that great — at least with in-store shopping by a third party. An Instacart shopper has to navigate crowded aisles just like you. As a result, the prices of individual store items may be marked up by 10% or more to compensate the labor involved. This means online grocery shopping mainly appeals to customers willing to pay a convenience premium.
A good reference point for online grocery shopping’s future might be Amazon Prime. It took 14 years for more than half of U.S. households to subscribe. A similar adoption rate for online grocery services will probably take considerably longer. The upside of a lengthy adoption period is that socially responsible investors will have years to advocate for a business model that pays social dividends.
Two Online Grocery Models Dominate Today…
Consumers encounter two different business models as they migrate their grocery spending online. The first is the per-order model. Shoppers pay a delivery charge on every order which varies by geography and order size. In the U.S., this is the only way to buy online groceries through companies like Walmart and Peapod.
The other way to buy online groceries is through a monthly or annual subscription. Delivery is free under the subscription model as long as a minimum order size is met ($35 is the most common threshold). This model is favored by Amazon, Kroger, and Shipt. Other companies, like Instacart and Fresh Direct, offer their customers the choice of paying for each delivery or carrying a subscription.
…But One Is Clearly Better for Reducing GHG Emissions
Belavina, Girotra, and Kabra (2016) have modeled the economics and externalities of the per-order vs. subscription approach to online grocery. They contend the subscription model results in lower GHG emissions than the per-order model under most realistic scenarios:
In practical terms, the subscription model’s emissions advantage over the per-order model amounts to between 5% and 10% of the food waste emissions created by an average citizen of the Western world.
Although subscription models encourage more food deliveries, the added emissions from extra miles driven are more than offset by lower emissions from reduced food waste. When the consumer’s incremental food delivery cost is zero, they are less inclined to overstock their kitchens. Purchases are more frequent, but basket sizes are smaller. And leaner inventories of perishable food means less food that ultimately ends up in a landfill.
Their analysis demonstrates the superiority of subscription-based online grocery delivery over per-order delivery charging. It does not directly evaluate the food emissions saved over traditional grocery shopping. But the source of the advantages of subscription-based online shopping holds in a comparison with in-store shopping — more frequent purchases and a smaller average basket size.
The difference in transportation-related emissions between subscription-based online grocery and store shopping is less clear. Miles saved on passenger vehicles that don’t go to the grocery store are traded for miles added to delivery trucks. The efficiency of this trade will vary with population density and online adoption rates. And the calculus is further complicated by the fact that most delivery trucks run on diesel (1.683 kg of CO2e per mile) instead of gasoline (0.417 kg of CO2e per mile).
The Big Social Savings Opportunity
Tens of millions of metric tons of GHG emissions could be eliminated annually if consumers receive at least some of their groceries at home via subscription services. This assumes the net difference in transportation emissions is small enough to be dominated by food-related emission savings. The social savings opportunity is as much as $12 billion just in the U.S. using our social cost of carbon range of $128-185.
Just one little problem. The most important effect of reduced food waste is not that less food goes to the landfill. The bulk of emissions savings comes from lower aggregate food demand and the avoidance of emissions related to fertilizers added to the soil, methane from livestock, and the transportation of food that is never eaten.
Lower demand is the enemy of business unless it can be compensated accordingly. In theory, subscription grocery delivery services may be able to capture some of the food cost savings consumers realize from less wasted food in the form of higher subscription prices. But competition will eventually erase this compensation.
Yes, higher food prices would likely offset the impact of volume losses for most companies in the value chain. The problem is that no business will encourage a model that loses it volume upfront for a less than certain ability to raise prices. It will be up to socially responsible investors and consumers to push companies in the right direction.
Walmart and Peapod should be encouraged to add subscription-based online grocery. Owners of grocery chains that partner with Instacart should try to nudge the service-provider to de-emphasize its per-order delivery fee option. As for Amazon investors, the goal should be à la carte services. Requiring an Amazon Prime subscription to access food delivery through an add-on subscription is a hurdle for lower income consumers.