IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v63y2017i6p1781-1799.html
   My bibliography  Save this article

Online Grocery Retail: Revenue Models and Environmental Impact

Author

Listed:
  • Elena Belavina

    (Booth School of Business, University of Chicago, Chicago, Illinois 60637)

  • Karan Girotra

    (Technology and Operations Management, INSEAD, 77305 Fontainebleau Cedex, France)

  • Ashish Kabra

    (Technology and Operations Management, INSEAD, 77305 Fontainebleau Cedex, France)

Abstract

This paper compares the financial and environmental performance of two revenue models for the online retailing of groceries: the per-order model, where customers pay for each delivery, and the subscription model, where customers pay a set fee and receive free deliveries. We build a stylized model that incorporates (i) customers with ongoing uncertain grocery needs and who choose between shopping offline or online and (ii) an online retailer that makes deliveries through a proprietary distribution network. We find that subscription incentivizes smaller and more frequent grocery orders, which reduces food waste and creates more value for the customer; the result is higher retailer revenues, lower grocery costs, and potentially higher adoption rates. These advantages are countered by greater delivery-related travel and expenses, which are moderated by area geography and routing-related scale economies. Subscription also leads to lower food waste–related emissions but to higher delivery-related emissions. Ceteris paribus, the per-order model is preferable for higher-margin retailers with higher-consumption product assortments that are sold in sparsely populated markets spread over large, irregular areas with high delivery costs. Geographic and demographic data indicate that the subscription model is almost always environmentally preferable because lower food waste emissions dominate higher delivery emissions.

Suggested Citation

  • Elena Belavina & Karan Girotra & Ashish Kabra, 2017. "Online Grocery Retail: Revenue Models and Environmental Impact," Management Science, INFORMS, vol. 63(6), pages 1781-1799, June.
  • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:6:p:1781-1799
    DOI: 10.1287/mnsc.2016.2430
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2016.2430
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.2016.2430?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Vishal V. Agrawal & Mark Ferguson & L. Beril Toktay & Valerie M. Thomas, 2012. "Is Leasing Greener Than Selling?," Management Science, INFORMS, vol. 58(3), pages 523-533, March.
    2. Steven Nahmias, 2011. "Perishable Inventory Systems," International Series in Operations Research and Management Science, Springer, edition 1, number 978-1-4419-7999-5, April.
    3. Peter J. Danaher, 2002. "Optimal Pricing of New Subscription Services: Analysis of a Market Experiment," Marketing Science, INFORMS, vol. 21(2), pages 119-138, February.
    4. Pradeep K. Chintagunta & Junhong Chu & Javier Cebollada, 2012. "Quantifying Transaction Costs in Online/Off-line Grocery Channel Choice," Marketing Science, INFORMS, vol. 31(1), pages 96-114, January.
    5. Emre Berk & Ülkü Gürler, 2008. "Analysis of the ( Q , r ) Inventory Model for Perishables with Positive Lead Times and Lost Sales," Operations Research, INFORMS, vol. 56(5), pages 1238-1246, October.
    6. Daganzo, Carlos F., 1984. "The length of tours in zones of different shapes," Transportation Research Part B: Methodological, Elsevier, vol. 18(2), pages 135-145, April.
    7. Howard J. Weiss, 1980. "Optimal Ordering Policies for Continuous Review Perishable Inventory Models," Operations Research, INFORMS, vol. 28(2), pages 365-374, April.
    8. Il-Horn Hann & Christian Terwiesch, 2003. "Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel," Management Science, INFORMS, vol. 49(11), pages 1563-1579, November.
    9. Gérard P. Cachon, 2014. "Retail Store Density and the Cost of Greenhouse Gas Emissions," Management Science, INFORMS, vol. 60(8), pages 1907-1925, August.
    10. Gérard P. Cachon & Pnina Feldman, 2011. "Pricing Services Subject to Congestion: Charge Per-Use Fees or Sell Subscriptions?," Manufacturing & Service Operations Management, INFORMS, vol. 13(2), pages 244-260, June.
    11. Carlos F. Daganzo, 1984. "The Distance Traveled to Visit N Points with a Maximum of C Stops per Vehicle: An Analytic Model and an Application," Transportation Science, INFORMS, vol. 18(4), pages 331-350, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Onno Boxma & David Perry & Wolfgang Stadje & Shelley Zacks, 2022. "A compound Poisson EOQ model for perishable items with intermittent high and low demand periods," Annals of Operations Research, Springer, vol. 317(2), pages 439-459, October.
    2. Gérard P. Cachon, 2020. "A Research Framework for Business Models: What Is Common Among Fast Fashion, E-Tailing, and Ride Sharing?," Management Science, INFORMS, vol. 66(3), pages 1172-1192, March.
    3. Paul, J. & Agatz, N.A.H. & Fransoo, J.C., 2021. "Towards Profitable Growth in E-Grocery Retailing - the Role of Store and Household Density," ERIM Report Series Research in Management ERS-2021-009-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    4. Onno Boxma & David Perry & Shelley Zacks, 2015. "A Fluid EOQ Model of Perishable Items with Intermittent High and Low Demand Rates," Mathematics of Operations Research, INFORMS, vol. 40(2), pages 390-402, February.
    5. Fredrik Olsson, 2014. "Analysis of inventory policies for perishable items with fixed leadtimes and lifetimes," Annals of Operations Research, Springer, vol. 217(1), pages 399-423, June.
    6. Elena Belavina, 2021. "Grocery Store Density and Food Waste," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 1-18, 1-2.
    7. Haughton, Michael A., 1998. "The performance of route modification and demand stabilization strategies in stochastic vehicle routing," Transportation Research Part B: Methodological, Elsevier, vol. 32(8), pages 551-566, November.
    8. Emre Berk & Ülkü Gürler & Saeed Poormoaied, 2020. "On the $$\varvec{(Q,r)}$$(Q,r) policy for perishables with positive lead times and multiple outstanding orders," Annals of Operations Research, Springer, vol. 284(1), pages 81-98, January.
    9. Vishal V. Agrawal & Atalay Atasu & Luk N. Van Wassenhove, 2019. "OM Forum—New Opportunities for Operations Management Research in Sustainability," Service Science, INFORMS, vol. 21(1), pages 1-12, January.
    10. Mohit Tyagi & Nomesh B. Bolia, 2024. "Optimal pricing of subscription services in the restaurant industry," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 23(3), pages 262-273, June.
    11. Ellegood, William A. & Campbell, James F. & North, Jeremy, 2015. "Continuous approximation models for mixed load school bus routing," Transportation Research Part B: Methodological, Elsevier, vol. 77(C), pages 182-198.
    12. Lei, Chao & Ouyang, Yanfeng, 2018. "Continuous approximation for demand balancing in solving large-scale one-commodity pickup and delivery problems," Transportation Research Part B: Methodological, Elsevier, vol. 109(C), pages 90-109.
    13. Jabali, Ola & Gendreau, Michel & Laporte, Gilbert, 2012. "A continuous approximation model for the fleet composition problem," Transportation Research Part B: Methodological, Elsevier, vol. 46(10), pages 1591-1606.
    14. Ouyang, Yanfeng, 2007. "Design of vehicle routing zones for large-scale distribution systems," Transportation Research Part B: Methodological, Elsevier, vol. 41(10), pages 1079-1093, December.
    15. Carlos F. Daganzo & Karen R. Smilowitz, 2004. "Bounds and Approximations for the Transportation Problem of Linear Programming and Other Scalable Network Problems," Transportation Science, INFORMS, vol. 38(3), pages 343-356, August.
    16. Bergmann, Felix M. & Wagner, Stephan M. & Winkenbach, Matthias, 2020. "Integrating first-mile pickup and last-mile delivery on shared vehicle routes for efficient urban e-commerce distribution," Transportation Research Part B: Methodological, Elsevier, vol. 131(C), pages 26-62.
    17. Jaller, Miguel & Pahwa, Anmol, 2020. "Analytical Modeling Framework to Assess the Economic and Environmental Impacts of Residential Deliveries, and Evaluate Sustainable Last-Mile Strategies," Institute of Transportation Studies, Working Paper Series qt4143j4pr, Institute of Transportation Studies, UC Davis.
    18. Anna Franceschetti & Ola Jabali & Gilbert Laporte, 2017. "Continuous approximation models in freight distribution management," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 25(3), pages 413-433, October.
    19. Karen Smilowitz, 2017. "Comments on: Continuous approximation models in freight distribution management," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 25(3), pages 440-442, October.
    20. Pahwa, Anmol & Jaller, Miguel, 2022. "A cost-based comparative analysis of different last-mile strategies for e-commerce delivery," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:63:y:2017:i:6:p:1781-1799. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.