Click & collect vs home delivery

According to a recent report by strategy consultants OC&C, growth in the volume of non-food orders made online for collection at store is set to surpass those delivered to the home in 2015, by a margin of 53m vs 38m.  This is not surprising given that the proportion of Tesco.com's non-food orders that are picked up in-store has been around two-thirds for several years. More interesting perhaps are recent efforts by the major UK supermarket operators to accelerate the growth of click and collect for groceries, mainly by adding drive-through locations at stores. Asda, Waitrose and Tesco are also experimenting with temperature-controlled lockers at stores and car park pick-up pods.

Grocery click & collect makes sense for customers who do not want to pay a delivery fee, or wait at home, or like the option of choosing their own fresh food in-store. It also means retailers do not have to subsidise delivery costs, making click & collect less margin dilutive (despite the service being generally free in the UK) and potentially more revenue accretive than home delivery. However, it still leaves brick and mortar grocers with two major longer term problems.

First, the incremental cost of picking orders rises significantly once the volume reaches a level (c10% of a store's sales for Tesco, higher for outlets with lower sales densities) that requires fulfillment to be transferred to a dedicated facility, or "dark store".

Second, as we've mentioned before, pure online grocers such as Ocado and Amazon Fresh may well be in a position to undercut brick & mortar supermarkets on the price of both delivery and products as they scale up their operations. This is a possibility that few traditional supermarket chains appear to be considering seriously - it's much easier to dismiss out of hand or simply ignore, especially given the difficulty of just keeping up with the current pace of change. However, it's worth noting Redburn, a leading European independent equity research house, is forecasting that Ocado's return on capital will be over three times higher than the sector average in five years' time. This sort of mid-long term forecasting carries a high level of uncertainty and may significantly overstate the potential of the pure online model. However, it's also worth noting that Redburn has called the stock perfectly in the last 12 months, putting a buy in May last year at just over 200p and cutting to Neutral when the price surged to over 600p earlier this year. Also, their forecasts do not allow for Ocado's future fulfillment centres to become smaller and more scalable, which would lower distribution costs and make its technology and services easier to sell abroad; nor do they factor in improved capital efficiency. These are both key strategic goals for Ocado. 

Tesco's announcement a few days ago that it will be cutting the price of one-hour delivery slots in the UK to as little as £1, along with more price cuts on commonly purchased items, represents the classic way for a market leader to deal with competition from smaller players. However, it may just end up driving more people online, which is ultimately bad for the economics of the largely fixed cost brick & mortar model and good news for pure online operators. 

In the end the question is not whether click & collect will become more popular than home delivery for groceries. Rather it is whether traditional supermarket operators can find the time and mindset to look beyond current issues and take much bigger, bolder steps today in order to be better positioned to meet the even greater challenges of tomorrow. One of these steps involves combining click and collect with a vastly improved in-store experience (Novastore).