The biggest challenge for grocery retailers today, regardless of size, is how to get volume growth. Since the start of the recession any sales growth has come from inflation, not from volume. The actual amount of food we buy is still shrinking, and retailers are keen to encourage us to buy more.
So it is easy to understand the fascination that online retailing holds for those involved in the grocery industry. IGD (Institute of Grocery Distribution) has just published its forecasts for growth until 2018, and they predict that online will be the fastest growing sales channel, doubling in size over the next 5 years, up from £6.5bn today to £14.6 bn.
As a percentage though, online will still be small – just 7% of a projected £206bn industry. And it has been well recorded that it’s profitability is considerably less than that for selling through a traditional store.
So why the headlong rush?
There may be a human element at play. Not only is online fast growing, it is a glamorous channel – all that new technology, all those apps to play with, all those fancy smart phones to work with. Much more exciting than getting the shirtsleeves rolled up and working out how to inject life into a standard supermarket.
But getting back to the facts, it is perhaps best to view online growth in absolute rather than percentage terms. Projected cash growth by 2018 is £8bn. Assuming that all the major retailers get a share of this growth to match their current market share, then Tesco would benefit from 30% of the incremental cash or £2.4bn, Morrisons would take £.9bn and Sainsbury £1.4bn. These are huge numbers and go some way to explaining the effort (and investment) being put into the channel. To this should be added the certainty that people are increasingly living their lives through smart phones and tablet computers and to ignore this may mean a substantial loss of market share.
The challenge therefore is as much about how to make profit as how to get growth and there are signs that supermarket minds are starting to address the issue.
Walmart puts it succinctly. The conditions which make online work are “market density” (lots of customers in a small area), “basket density” (each order has to be high value), and “route density” (every truck needs to go out fully loaded).
Dutch company Ahold has decided that click and collect is a better way forward than home delivery, and is investing in pick up points and secure lockers.
An IGD survey of UK retailers put developing tools to understand the financial implications of online as number 5 on their “to do” list.
A small business which does not have luxury of massive scale and matching mountains of cash to experiment with online should remember that traditional grocery purchase will still account for 93% of sales.Smaller retailers will continue to prosper provided they understand what their shoppers want, and make the instore experience inviting. It would not though be sensible to ignore technology developments, and at the least these businesses should be interacting with their customers via tablets, smart phones and the web. They will also need to keep a watchful eye on developments, and be ready to consider ways of retailing on line that add to sales but minimise hits to profitability. Suitable models will no doubt emerge as more businesses grapple with the online challenge.