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.

Discount Supermarket Growth Slows - Is It All Over for ALDI et al?

Discount supermarkets like Aldi and Lidl are making headlines again, but this time for sales slowing rather than growing.

Editor of The Grocer, Adam Neyland wrote a piece a couple of weeks ago entitled “Is the discount boom over?” This was followed a few days later by figures from market research company TNS Worldpanel, which showed that in the 12 weeks to June 14th Sainsbury and Morrison grew faster than Aldi and Lidl, with Asda growing at about the same rate. Actual figures were +6.5% for the total grocery market, Morrisons +9.3%, Sainsbury +8.9%, Aldi +8.7%, Lidl +7.5%, and Asda 8.2%. It’s a marked change. In the previous months the discounters were growing at anything up to 3 times the rate of their main stream competitors.

Why the change?

As Neyland points out some slowdown in growth was inevitable as competitors fought back with price promotions, million £ advertising budgets, and a focus on the quality and value of their fresh food. Which is a lesson to all of us to never underestimate the competition, particularly in UK grocery.

I think there is more to it.

It is interesting to reflect on what caused the discounter boom in the first place. Of course some of it was due to consumers on a strict budget searching for value as food prices rocketed. Much responsibility though must be laid at the door of the media. Not a day went by without headlines about the middle classes turning to Aldi, that it was now more chic to be seen with an Aldi bag than a Waitrose one, and that discount car parks were full of Range Rovers and Mercedes. No wonder many read the hype, worried about missing out, and nipped along to see what all the fuss was about. The monetary value of all that media coverage must have run into millions.

The big question is, of those who made the visit, how many tried, were disappointed and never came back versus how many changed their shopping habits and returned every week. Market research company Him! (yes, new to me too, but they are a genuine outfit despite the odd name), does regular research with discount shoppers. They say that shoppers are less satisfied with discounters this year than they were in 2008. Also that recent shoppers, and more upmarket shoppers expected more from the stores and were disappointed by what they found when they got there.

There is a lesson here too, which is that a business cannot be built on people buying just the once, rather, long term growth will come from having a solid base of loyal fans who buy again and again.

So what of the future?

Discounters have many devoted customers, but it is not a way of shopping that appeals to all. If it were, the market share for all three discounters would be far higher than its current 5.9%, which compares with a share of 11.6% for Morrisons, 16.1% for Sainsbury, 16.8% for Asda, and 30.8% for Tesco.

Adam Neyland rightly concluded that discounters will not go away. Largely privately owned so without shareholder pressure for fast returns, they have cash and big ambitions. Aldi is committed to opening a store a week until they have 1500 in total. It also recently won best supermarket award from Which?, the consumer organisation. Lidl is supporting consumer trends with the addition of Fairtrade products, and a commitment to sourcing British beef, chicken and pork.

Whether they will make a major breakthrough is questionable. Already some research by Him! shows the numbers shopping at discounters dropping from 15% to 13% of the population, which compares with 79% visiting a mainstream supermarket. And if you look at shares held by all discounters, it has not moved much from the days when Kwiksave was operating. Indeed Edward Garner of TNS has consistently argued that the growth seen in discounters is merely a mopping up of market share held by the now defunct Kwiksave.

The future for discounters is likely to be one where the total sector will hold its market share, and within that there will be winners and losers with Aldi consolidating its position as the main player.