Should Small Food Retailers Offer Online Shopping?

As the big supermarkets report Christmas sales much press comment has focused on online food shopping and what it has contributed to a successful Christmas performance.

First out of the blocks was Morrisons who have no online presence, saw sales drop by 2.5% over the Xmas period and were slated for not being online where all the growth is coming from.

Sainsbury reported sales up 0.9%, with online up 15%, a recovering Tesco reported sales up 1.8% with online up 18%.

On the other hand, Aldi with no online presence grew sales by 30% in the last twelve weeks and are reported to have had a highly successful Christmas trading due to offering specialist foods like goose.

More thoughtful commentators highlighted the online conundrum which is that it may be growing fast but it remains far less profitable than sales though shops. One estimate widely quoted is that it costs an additional £15 to fulfil an online order of around £70 - £80, yet the average price charged for delivery is around £3.50p.

One thing is clear – offering on line food shopping requires dedicated, sophisticated and therefore pricey technology, and expert staff to run it.

What are the facts?

Consumers are embracing on line grocery shopping. The this way of buying has grown at about 15% per annum and the IGD estimates that it will virtually double in size over the next 5 years. It is still small though. Worth around £5.6 billion today, it remains just 3.6% of total grocery sales.

The IGD could be underestimating the pace of change. Growth rates to date reflect a business in its infancy, which is still struggling to iron out wrinkles such as matching delivery slots to when consumers are at home, and  causing irritation by sending the wrong product, or an unwanted substitute product, or product with overly short shelf life left. Retailers are working very hard to resolve these issues.

On the shopper front, the pace of change could accelerate dramatically with the increased use of smartphones and tablets, and supply of easy to use apps which make the online shopping experience very simple and ultra convenient as it can be done anytime, anywhere. In the UK today 2 in 5 people own a smartphone and this goes up to 66% in the 16-24 age group and 60% for 25- 34 year olds. 46% of ABC1’s own a smartphone.

So, if one believes that online shopping will not go away, is an on line facility crucial? Without it will small retailers face a slow decline to oblivion? Is it better to retain customers rather than lose them, albeit at a lower margin than if they shop conventionally? Or,  is it better to invest the considerable sums of money required to set up and manage an online facility into another way of retaining customers.

Assuming that the basics of quality and value for money are in place, a good place to start might be to understand who your customers are, why they visit you, and critically, who is your competition. If your closest competitor is offering an online service then it would help to be clear about whether this is drawing customers away from you, and what your shop could offer that would trump this.

A customer profile which skews towards young families may mean an online facility will be welcomed, as IGD research published in June 2012 tells us that of the 24% who bought groceries on line in nearly half had children under 5. Conversely, just 13% of all those who purchased on line were over 65.

It is difficult to get away from the fact that developing an online offer will be expensive. There is no easy way to test whether it might be a successful venture without technological investment. Those retailers wrestling with costs might want to consider “click and collect” rather than home delivery. Whilst this is still a small part of online grocery shopping (Tesco said that 5% of their online business was done this way before Christmas) it is exploding in other sectors, offering as it does a saving in time for the shopper, and helps avoid having to wait in for delivery.

Finally, are there any examples of retail businesses who are making money from selling food online? The sceptics might quote Ocado, which sells only online and has not made any money in the 10+ years it has been going.

Optimists might point to  Riverford Organics the online veg box delivery service which grew profits to £1.36m in the year to end April 2012 on a turnover of £41.8m. Guy Watson, Riverford’s founder is clear that its success is not due to being organic, rather it is a combination of being local, working closely with farmer suppliers, some of whom have 7 year contracts, and above all being of the highest quality, something he and his team make sure of by regular taste tests versus competitive products.

Nevertheless, even Riverford with its 40,000 customers has suffered ups and downs in profit fortunes, although has not made losses. It does though show that retailing online can earn profit.

To conclude. Online shopping is here to stay. It probably does need to be seriously considered and costed, particularly for specialist outlets.