Waking up to the elephant in the online grocery space
Last week at the World Retail Congress in Paris I heard for the first time ever a senior supermarket executive recognise publicly that the growth of online grocery shopping is not good for the industry. What's more, this admission came from Michel Edouard Leclerc, head of France's largest hypermarket chain that has been most aggressive in opening click and collect outlets (known as "Drive" in France) and now has a 40% of the EUR5bn online grocery market. Leclerc stated that once the initial benefits of first-mover advantage wear off and the competition responds, the online business becomes increasingly cannibalistic of store sales. Click and collect is only successful, he said, as long as it doesn't grow much more. Indeed, according to a study done in France last year by IRI, a leading market research firm, once "le Drive" accounts for around 8% of a store's sales, most of the incremental sales are taken from the store.
This is obviously not what the CEOs, heads of e-commerce, and shareholders of major supermarket groups want to hear. It is more reassuring to look at research showing how customers who shop both online and in store at a particular chain spend two or three times more than those who use just one channel. However, this only works in the early growth phase and all it means is that each chain's most loyal customers are becoming even more loyal, but at the expense of each others' less loyal customers. It's a zero sum game: for the market as a whole, the online channel adds costs, but not sales.
These costs are obviously much higher for home delivery than for click and collect, which adds to the profit pressures already being felt from the rise of discounters in the UK, where home delivery already accounts for 5% of the total grocery market and the £3 average service fee represents a 10% margin subsidy on an average £100 order. This subsidy is likely to persist, or get even bigger, given retailers' desire to follow the customer and steal or defend market share, and the existence of pure online grocers such as Ocado, which could be more profitable than Tesco in a few years' time, and Amazon Fresh - whose main strategic purpose is to help Amazon sell more stuff to more people more regularly at a lower cost.
So what to do? Some food retailers privately admit that e-commerce is uneconomic but that they have to provide the service because that's what an increasing number of customers want. In other words, the genie's out of the bottle and not going back in. At best, it can be temporarily contained, as in France. When questioned about the negative impact on profits, answers we've heard from supermarket executives in the US and UK vary from "It's not something we're really thinking about", "It's something the accountants will have to deal with", to "It will depend how it's presented to investors."
Unfortunately this problem will only get worse as more customers shop online and picking has to be moved out of existing stores into dedicated fulfillment centres, which further add to operating and capital costs. The only long-term solution we can see to the online cannibalisation conundrum is to:
a) Invest in the next generation of automated technology to secure the lowest fulfillment costs; b) create a new bi-modal format combining the best of the online and in-store experience; and c) transform from manufacturers' agents into customer service providers that sell food.
The latter will require retailers to better SEE (Stimulate, Engage & Empower) their staff so they can better SEE customers. Investing more in staff when sales are stagnant or falling is not an easy sell. However, they - not stores - are a physical retailers' most valuable assets, and the most under-utilised today.