Online Grocery Shopping - Lively but Challenging

Optimists viewing the online grocery sector would point to its growth and its ability to attract new entrants. They would say that participation is crucial when convenience is king, and anything can be purchased at the click of a button.

Growth projections remain high. IGD has published its latest forecasts, and whilst rowing back from previous projections of doubling in five years, it is still predicting a 68% growth in the 5 years to 2021 compared with 10% for the grocery trade as a whole. Mintel market researchers are even more bullish forecasting a 73% growth in 4 years.

The Amazon Fresh entry into online grocery has added to the excitement. The move is a further step in its quest to infiltrate every aspect of consumers’ lives and their latest foray shows how seriously they are taking the market, now offering fresh food alongside thousands of packaged grocery products.

But….

It is well known that profits from online grocery shopping are slim to non existent. Whilst this will not bother Amazon who famously have operated for 20 years on a model which more or less ignores its shareholders in favour of investing to expand faster, it is an issue for the major, publicly owned UK grocers, and for smaller retailers too.

Profits versus growth is a constant challenge. Tesco’s CEO Dave Lewis has stated an intent to focus more on profits than sales growth, and in a recent statement said that “online grocery growth continues to moderate”.

A greater focus on profit would suggest that the IGD and Mintel forecasts are still too optimistic. Tesco’s annual growth rates are around 8% -9% as are Sainsbury’s. Ocado, another company with a relaxed attitude to profitability, has seen growth rates moderate to around 13%. Still high, but possibly more to do with having just a 5% market share compared with Tesco at around 40% and Sainsbury at 17.5%.

Adding to the challenges, consumers do not seem to be rushing to embrace online. 20% of people claimed to shop online in 2010, but six years later this has only risen to 29%, despite the massive increase in use of smartphones and tablets whose ubiquity and convenience were supposed to transform shopping, allowing purchase any time anywhere. At least a quarter of the population have declared no interest at all in shopping online.

And the Amazon Fresh entry, at the moment certainly, does not look like a model for either massive growth or improved profits. So far, the Amazon offer does not appear to be much different from what is already available. It has made much of its one hour delivery slots, but Ocado offers this too. It may have an edge with its offering of local artisan foods, but this is unlikely to result in big volumes, and would pose a huge logistical problem once the company expands beyond central London postcodes.

The other show stopper is that Amazon delivers in cool bags rather than refrigerated vans. As a shopper I would be deeply worried about having my perishables delivered like this, wondering how long they had been in transit for, and how hot the van was.

The growth in online grocery shopping and the advent of more competitors means that retailers have to seriously consider an online option, otherwise they risk losing sales to competitors.

The key is to stick with cautious expectations on growth and profitability to avoid nasty shocks, and take a long term perspective.

The alternative is to stick resolutely to bricks and mortar, but ensure that what is offered is so different and exciting that shoppers will stay loyal despite any inconvenience.

Either way presents its challenges.

Price Still the Most Important Consideration for at Least 35% of Shoppers

From IGD comes research which groups shoppers by attitudes and behaviour rather than the more traditional demographic analysis of AB, C1 etc..

IGD have found 6 categories of shopper:

Brand purists (26%)
These shoppers are more brand loyal than the average shopper, and will plan their shopping in the knowledge that they will be able to find the brands they like.

Habitual loyalists (13%)
Like to plan their shopping, buy familiar products and stick with one or two stores rather than shop around. They tend to be older, with an average age of 59.

Savings seekers (18%)
This is the group that puts price ahead of all other considerations.

 Discounter enthusiasts (17%)
Like savings seekers this group is also concerned with how much they spend on food and groceries but are not willing to compromise on quality 

Technology adopters (16%)
These shoppers have the highest interest in using technology for food and grocery shopping and do more online shopping than the average to save their precious time. They tend to be younger, London based, and shop frequently.

Foodie adventurists (10%)
Are the most likely to cook from scratch, try new recipes, and to buy new products on impulse.

It is dangerous to be overly definitive when assessing how to make snapshot data like this actionable, and shoppers will fall into more than one box, but some points jump out.

First, it is perilous to underplay the importance of price.  At least 35% of shoppers (savings seekers and discounter enthusiasts) are very price conscious, and it would not be rash to suggest that a good proportion of those in the other boxes are price conscious too. Indeed it is striking that the IGD has not found a category that subordinates price in favour of some other attribute.

Aldi certainly feels that price remains critical. It announced yesterday that it intended to be "cheapest for ever" in Britain, and cut its prices on meat fruit and vegetables. Meanwhile Sainsbury announced that it was pulling away from multi-buy promotions in favour of everyday low prices.

Secondly, people remain very traditional in their food buying habits. Only 10% can be described as adventuresome compared with the 39% of brand purists and habitual loyalists who do not stray too far from the familiar.

Thirdly, the percentage of technology adopters is surprisingly small given all the hype we read about consumers supposedly turning in droves to shopping on smartphones and tablets. The number may explain why online grocery shopping  is not reaching the average 15% per annum growth rate some had predicted. Ocado, the dedicated online grocer, clocked up 13% growth in the most recent quarter, and Sainsbury just under 10%. Tesco stated that their growth over Christmas was around 5%. Tellingly, Dave Lewis, Tesco chief executive officer, said that the company was being “much more thoughtful about the economics of online versus the offer elsewhere in the estate.” , which suggests that Tesco does not intend to push for high online growth rates at the expense of profit.

Amazon Pantry Home Delivery – How Much of a Threat to Traditional Grocers’ Online Shopping?

The short answer is that Amazon will pose very little threat.

For starters, use of the Amazon service depends on being signed up for Amazon Prime, at a current cost of £79 a year, although there is a special offer of £59 for three days this week. Amazon won’t reveal how many Prime users it has in the UK, saying only that it is “millions”, but one would judge that it won’t be as many millions as are able to access online shopping without subscription handcuffs. Immediately the market opportunity for Amazon has shrunk.

Then there is the weird charging system for delivery. This goes by a price per box of £2.99p, with the ordering system telling you when your groceries are so bulky that they need to fit into another box, which costs 99p. Far less transparent than traditional online shopping where there is usually a set price up to a certain order value, and free thereafter.

And the  Amazon service is limited to dry goods only. It does not offer fresh produce such as meat, fish, vegetables or fruit. So the shopper either has to leg it to the supermarket, or has to log in to a traditional grocer to complete their weekly order, wait in for two deliveries, and probably pay a charge because this second order does not meet the minimum criteria for free delivery.

So what are the benefits of Amazon’s service?

Prices are cheaper in some instances. 100g Nestle instant coffee costs £3.00p from Amazon versus £3.30p in Tesco. However, Kelloggs Cornflakes 750g are the same price. Amazon is not offering branded goods at Aldi or Lidl prices which might have been an attractive strategy.

Shopping online is supposed to be easy and convenient. With membership a prerequisite, a complicated delivery charge, and only offering half of the groceries that are needed in the home, Amazon is anything but convenient. It is not cheap either.

Mixed Fortunes in Online – Waitrose down, Ocado static and Morrisons struggle with profit

The online conundrum continues. No one seems to have worked out how to find the holy grail of growth in both sales and profits.

Waitrose, purveyors of food to the well heeled, surprised market watchers last week with the news that their total like for like sales dropped by 1.3% in the last 6 months, the first decline in over 6 years. Even more surprising was the news that online sales plummeted by 13% due it seems to pulling out of promotional activity.

Ocado, equally upmarket, and an online only business, announced by contrast that its sales had grown by 15.3% in the last three months, roughly the same rate as in previous quarters.  Amount spent per order continues to drop.

Morrisons, who were late into online and partnered with Ocado to get going, did not declare sales, but CEO David Potts hinted at profitability problems, saying about the tie up with Ocado “ Its very important that it does become profitable growth. At the moment it is best expressed as an internet investment.”

Running an online operation appears to be a drain on both retailer and manufacturer profitability.

The Institute of Grocery Distribution just a week before the above results were announced published an article entitled “Five killerquestions to ask when moving online”. The third question, “can you invest for growth?”, resulted from  IGD’s finding that many manufacturers, even larger ones, are still mastering the basics of online retailing, and need to spend more money on developing their online offer, particularly in understanding shopper behaviour.

Operating in online grocery shopping does seem to come at a heavy financial cost.

Online Grocery Shopping - Pointers to Making a Profit But no Easy Answers

Half year results from Ocado, the company which only sells groceries on line, show that profit before tax fell to £7.2m compared with £7.6m this time last year. The decline is attributed to paying off interest on debt and accounting for depreciation charges.  CEO Tim Steiner confirmed once again that he is not particularly bothered about short term numbers.

This lacklustre profit performance comes despite a 15% sales increase, which makes Ocado one of the front runners when it comes to generating growth.  Tesco is growing by about 11% and Sainsbury by 6%.

So if revenue growth alone is not enough to generate profits, what might?

The ability to offer high price high margin lines alongside more basic products is key. The heavy intrinsic costs of running an online business (capital spend, delivery and picking costs, website maintenance) mean that online will not work on a low margin mix.

A high market share in densely populated areas helps, as it avoids delivery vans having to drive miles between customers. This could explain why supermarkets offer very generous money off incentives to use their online service, and have substantially reduced charges for home delivery.

Cost efficiency is vital. Some supermarkets pick orders in their stores, but there is a trend to building  “dark stores”, which are purpose built fully automated warehouses, and considered by many to be a lower cost method of operating. Ocado, having no stores, has operated like this since the start. Indeed it feels that its proprietary technology is so cost efficient that supermarkets will pay to have access to it. They already have a partnership with Morrisons, and are rumoured to be on the point of signing up another company.

Even when assembling orders is done in store there are opportunities for continuous cost improvement. A recent survey found that best in class order assemblers are three times faster than the worst.

Click and Collect has been viewed as a further way of saving cost, as a separate fleet of vans is not required. However, John Lewis’s announcement this week that they will charge £2 for Click and Collect orders under £30 illustrates that even this mighty retailer  finds it challenging to make an acceptable return.

All of which suggests that there is no easy path to online profitability. Indeed Andy Street, CEO of John Lewis when announcing the new charge reportedly said that many web based business models have become “unsustainable and “bonkers”. Words probably worth remembering.

Grocery Growth Forecasts - Severe Implications for Supermarket Suppliers

The Institute of Grocery Distribution has just published forecasts of growth in the grocery market to 2020. In a nutshell they endorse trends already highlighted for online and discounters, saying that sales will continue to power ahead in these sectors. They signal that growth rates in convenience stores will decelerate, and that big stores, whilst remaining the place where most of us will do most of our grocery shopping, will show a sales decline.

One could challenge the exact numbers, for example the near doubling of online and discounter sales seems optimistic, but the shape of the growth makes sense, and whilst pages of commentary have been written about the effect of the forecasts on the grocers themselves, few write about the impact on suppliers – which could be huge.

Here’s why.

The key issues are the nature of the shopping environment in the growth sectors, and the steps mainstream supermarkets will  take to maintain profits as sales through bigger stores start to fall.

Consumers shop online for reasons of speed and convenience. Sitting in front of a small computer screen, or worse still, fiddling with tiny buttons on an even smaller smartphone or tablet, they just want to call up a previous order, tick what they need, possibly look at what’s on “special” and check out. Few can be bothered with browsing through hundreds pages of products on the off chance that they see something that takes their fancy. So, if a product is not on a favourites list, or being sold at a discount then it will not be bought.

Discounters too offer a different shopping environment. Typically they offer a very narrow range and stock few national brands. So the chances of getting listed by an Aldi or Lidl are small, which means that many suppliers will miss out on the discounters’ growth potential.

Convenience stores, who may be growing more slowly over the next years, but will still be a big sector, can only stock a limited range because of their size.

On the other side, mainstream grocers, grappling with falling sales in their big stores, are on a mission to streamline, which means stocking fewer brands and fewer pack sizes.

The outcome of all these factors means that the winners in the next 5 years will be:

-           big global companies who can buy their way into wherever they want to go. Examples are Coca Cola, Unilever, Nestle 

-          middle ranking companies who own leading brands with a loyal following. Examples would be Warburtons, McVities , Mueller

-          suppliers of retailers’ own brands who can operate at lowest costs

-           niche specialist players who appeal to supermarket operators because they offer something genuinely different, and who only require a listing in a small number of big stores to be viable.

Companies who may need a strategic rethink are those with brands which are rarely top of mind, non essential,  poorly advertised and promoted, and often bought on impulse because they caught the eye in store. Examples of this middle group might be Dairy Crest, Premier Foods, and smaller confectionery and soft drinks companies.

The impact on suppliers does not stop there. These middle ranking businesses also have suppliers and they too will be squeezed. Either their products will not be required, or they will have to offer sharp prices to maintain the business. We saw signs of this with Premier Foods “pay to stay” demands. Premier swiftly saw the injustice of this. Other businesses might not.

Discounters, Convenience, Online - Growth but Momentum Slowing

The general consensus among supermarket watchers is that to grow sales you have to be represented in  the three growth areas of discounters, convenience stores and online.

Today’s results announcement from Sainsbury, Tesco results a couple of weeks ago, and the most recent Kantar Worldpanel figures on grocery market performance all provide helpful detail about how the three areas are performing.

It remains true that these three areas are still showing fast growth, but the rate of increase is slowing markedly.

Discounters

Aldi and Lidl are coming down from the highs experienced in early 2014, when Aldi was clocking up increases of 30% plus, and Lidl was growing in the late teens. Latest data from Kantar indicates that Aldi growth has slowed to +15% and Lidl to +10%. These growth rates do though remain streets ahead of rival supermarkets who all, with the exception of Waitrose, are in negative  territory.

Convenience

Sainsbury has shone here with a 16% sales increase in the last twelve months. They opened 98 stores last year and remain committed to opening around the same number in 2015. Their growth suggests that by stocking the right quality and range, particularly food that can be translated into quickly prepared meals, shoppers will prefer to buy locally rather than trek to a supermarket.

Tesco has fared less well, with their Metro stores showing flat sales for the first 6 months of last year, but climbing back to growth of 4% in the final quarter. These rates are well ahead of their performance in larger stores, and may accelerate if Tesco turns their whole trading performance around.

Online

The battle for online shoppers is fierce. Most stores have dropped their minimum order size, Sainsbury, Tesco and Asda to just £25 and Ocado to £40. Delivery costs have been slashed through offers like delivery passés. First orders receive an attractive discount.

Despite these lures, growth rates are slowing. Numbers of orders are growing, but are not being matched by revenue growth. Sainsbury reported a 13% rise in orders but only 7% in revenue, Ocado in the first quarter grew orders by 18% but revenue by 15%. Tesco did not report orders but revenue grew by 11% in 2014. These growth rates are some way off levels seen in previous years. They suggest that talk of online sales doubling by 2019 are optimistic, and that the already very slim profit margins from online sales are being further eroded. After all, it must cost as much to process and deliver a £25 order as it does one of considerably higher value.

Growth but what about profits?

Whilst representation in discounters, convenience and online may provide the elusive growth so many retailers and suppliers seek, all three present severe challenges. Online is a huge drain on profitability for retailers, and difficult for suppliers of all but the most recognisable of brand names. How, suppliers will be asking themselves, do they remind online shoppers to buy their goods, unless they pay for visibility on the computer screen via money off promotions.

Convenience also poses profit challenges for retailers because of the high distribution costs involved, and suppliers face the issue of limited ranges being available in such small stores. Suppliers are also strapped when it comes to getting listings in discounters because they stock such a limited range.

Growth is achievable by supporting discounters, convenience and online. The challenge is to operate profitably whilst achieving the growth.

Online Grocery Shopping - Growth Rates a Bit Disappointing?

Grocery market watchers still predict a doubling of growth in online grocery shopping by 2019, and are quick to criticise companies who seem not to be embracing the channel with gusto.

The enthusiasm is perhaps understandable. After all, many product sectors like books and music are nearly all bought on line, clothing is increasingly so, as are household goods.

Certainly, online is growing fast when compared with sales through stores. Tesco’s online sales over Christmas grew by 12.9%, Sainsbury  by 6%, Ocado by 14.8% and Waitrose by 26%.

   

However, the ONS tells us that total online sales of grocery products were up just 6% in December, and a look at trends through major grocers tells us that the rate of increase is slowing markedly. This despite heavy promotions,  the advent of click and collect and increased ownership of tablet computers and smartphones which are supposed to make the whole online shopping experience cheaper, easier, and therefore more attractive.

Retailers are ploughing enormous amounts of money into building their online presence.  Tesco is currently charging just £1 for certain delivery times, and allowing £15 off  the first shop. Ocado is offering £20 off the first shop and free delivery on a Wednesday. Sainsbury offers £25 off the first shop and £10 off plus free delivery for subsequent shops.  Asda charges just £2 per month for delivery. The low delivery charges are especially profit draining given the cost of getting an online order picked, put on to a van which has to be taxed, insured serviced and fuelled, and dropped at the customer’s front door.

Click and collect and the chance of shopping on high tech gadgets do not seem to be catching on in a big way. A look at IGD data examining shopping behaviour shows that as of October 2014 just 26% of online shoppers were using click and collect. Data to April 2014 shows 18% shop on a smartphone and  23% on a tablet computer.

The same data suggests that online is still used infrequently. 21% of online shoppers  use the channel every week, and a further 11% use it every 9 or 10 days.

It is interesting to compare the growth rates of online - heavily promoted, technology friendly, highly service orientated with click and collect or drop at the door – with those of Lidl and Aldi who offer none of that, and yet grew by 15% and 23% respectively in the twelve weeks to beginning of January.

Looking at Online Grocery Shopping From the Supplier' Viewpoint

Life is not easy for suppliers selling their products through a supermarket’s online channel. The tried and tested tactics which work in the physical supermarket are of minimal use.

Online offers no opportunities for eye catching secondary displays designed to capture shopper attention should the brand be missed on shelf. There is no way to sample something new and delicious. Promotions which are visible when the shopper casts his or her eye along a 20 metre shelf are easily missed when confined to a screen measuring 15 inches x 6 or less.  The challenge is particularly acute for impulse products like confectionery, or soft drinks, lines which are probably not on the shopping list but are tempting when spied in store.

Whilst there may be some debate about how big the online channel might become, there is no doubt that it is more buoyant than traditional supermarket shopping, and suppliers are slowly waking up to the fact that this channel needs dedicated resources if they are to get the best out of it. 43% of major multinational suppliers interviewed by the IGD (Institute ofGrocery Distribution) have staff assigned to the online channel at least as part of their role. However just 24% have dedicated people to the channel on a full time basis, and only 10% have tailored the way they sell their products on line.

Without imagination and focus many suppliers resort to money off mechanics to promote their products, which can be expensive, and is at best a short term solution.

The key of course is to understand how shoppers approach online grocery buying and then work out how best to capture their attention. Research company Evolution has found that online shoppers tend to be very single minded and this not surprising given that the main reason to use online is to save time. Only 4% start their shop by browsing various categories, and just 1% start by looking for meal and recipe suggestions. 19% start with the special offers page (although 53% get round to it at some point). 25% shop by keyword (milk, eggs etc) and tend to work from a shopping list. Suppliers may want to explore opportunities on the “favourites” page. This is the first page visited by 44% of shoppers, and around 56% refer to this page at some stage during their shop.

It is becoming clear that a one size fits all approach is unlikely to work online, and that personalisation will become increasingly important. To get the best out of a marketing activity it must be relevant to the needs of individual shoppers, whether they might be one of the 35% who do their weekly shop online, or more likely, one of the 53% who only use online infrequently to do a big shop. Equally, there is little point in featuring a pet food initiative to a non pet owner, or a beer blitz to someone who only drinks wine and spirits. 

Having good shopper research data helps address the challenge of selling on line where space is limited and competition to get noticed is fierce.  It is also critical when negotiating with retailers who will have the last say about the strength, depth and promotional support demanded to feature a particular supplier’s products. 

How do Mainstream Grocers Deal With the Quagmire of Low Market Growth, Rampant Discounters and Budget Minded Shoppers?

Food sales in the 12 weeks to 20^th July grew attheir slowest rate for 10 years, up just 0.9% in value. 

Despite the uptick in the economy, and in consumer confidence, people are reluctant to give up their thrifty food buying habits acquired during the depths of the recession. They are helped of course by being able to shop at discount supermarkets. Aldi and Lidl have raised their quality game, kept rock bottom prices, and been rewarded with rocketing growth rates.

What then is the best way to deal with lacklustre growth rates, budget conscious consumers and rampant discounters?

Suggested action is falling into two camps. One says that mainstream grocers must reduce their prices by meaningful amounts, and soon. The other says go where the growth is and invest in online grocery shopping and convenience stores.

The IGD continues to back its online growth forecasts saying that sales will more than double in 5 years.  It points out that online grocery shopping is still in its infancy. Just 27% of shoppers use on line, and only 10% do their major shop online. The IGD reckons that the convenience of shopping online, providing as it does the ability to shop anytime, anywhere, combined with new initiatives being developed by retailers, and the added ease provided by mobile technology, means that more and more shoppers will gravitate to online buying.

Certainly some retailer initiatives look attractive. The boom in click and collect outlets avoids the need to wait in at home for the order to arrive, and even at home it is possible to select one hour slots leaving the rest of the day free. Retailers are also working on apps to make shopping easier. Instead of trawling through every category, Ocado’s app provides personalised guides to what is usually bought, what was bought last time, and ready prepared lists of what might be needed. Ocado is a leader in mobile shopping and says that 45% of its shoppers check out on a mobile gadget.

Retailers are also working on the opportunity to build volume over and above a standard shop by linking products in a way that is not possible in store – pizza and beer for example.

IGD points out that further growth will come from the advent of new players like Morrisons, the Coop, and Iceland who are all testing online shopping methods.

The above initiatives should encourage more online shopping, but there are two snags. First they are a double hit financially being costly in terms of investment and considerably less profitable than regular in store shopping. And second, they do not solve the knotty problem of uncompetitive pricing compared with the discounters.

Sainsbury’s tie up with discounter Netto starts to address the pricing issue, and there is a suggestion that Tesco could manage its stores like it does its product range, with three tiers of shops – value, to provide rock bottom prices, middle, and Finest as a Waitrose look alike to keep the profit margins up.

It is difficult to see how mainstream supermarkets will be able to afford a big drop in prices and the huge investment in online without radical restructuring, a dip in profits, and the usual squeeze on suppliers.

Competitive pricing has to be the priority, and with it an acceptance that online may not grow as fast as many predict. 

FarmDrop - The Online version of a Farmer's Market. Will it work?

 FarmDrop aims to connect producers and consumers using all the latest  online retailing ideas. It is a digital version of the traditional stall found at farmers’ markets, and has been set up by Ben Pugh a former city worker, and Ben Patten. Currently the business is trying to raise £400,000 through a crowd funding initiative, and has already received £301,000 in pledges from 105 investors.

Is FarmDrop a good investment? Will it, as the two Bens hope, turn out to be “the food system of the future”.

At first blush it all looks very simple. Consumers sign up to their local FarmDrop, order their goods on line, and pick them up at a fixed central point on the same day every week.

Producers fulfil the orders and deliver them to the central point.

And a “Keeper” mans the pick up point, ensuring that customers are given their goods.

Money wise, producers receive 80% of the retail price, the Keeper 10% and the brains behind the idea also get 10%.

At present there are 17 Drops either open or in development.

The FarmDrop website summarises the benefits of the idea as follows:

Consumers receive local produce, and the satisfaction of knowing they are supporting farmers. Keepers also support farmers and earn money in the process. Producers receive the lion’s share of the retail price.

The business model raises some issues. Its definition of local is broad with producers needing to be within 100 mile radius of the central point. Some might feel that this is not very local at all. Wholesalers can be used, which adds a further layer of complication, and is at odds with the idea of wholeheartedly supporting producers.

The biggest issue is that FarmDrop has underestimated the pivotal role of the Keeper without whom the idea collapses. The Keeper is charged with signing up producers to support the Drop, recruiting the customers, and troubleshooting any problems that might emerge either from producers or customers. Their financial return from putting in all this effort is modest. The example quoted by the operation says that keepers could earn £640 per month for 7 hours work a week, 5 hours manning the drop and 2 hours on admin. That comes out at £23 per hour and takes no account of the time, petrol, or telephone costs spent setting up the drop, enrolling producers, and signing up customers, work which is likely to be ongoing as some customers and producers will inevitably drop out of the system and need to be replaced.

The return to the operators of the business is the same as the Keeper’s but their involvement seems to be limited to setting up the website, and doing some training. The founders assert that “we stand for fairness”. The allocation of reward for the hard pressed Keeper does not sound at all fair.

It would be good if FarmDrop could reassess the way the model works, for a successful method of enabling producers to reduce reliance on supermarkets is to be welcomed.

Unless they address either the load being put on the Keeper’s shoulders, or increase the financial return the Keeper receives, FarmDrop will  remain a very small business, and investors will be disappointed.

Online Grocery Shopping - Being Realistic About Growth Prospects

The Institute of Grocery Distribution has just updated its 5year growth forecast for the UK grocery market., and predicts a slower rate of growth than in the last 5 years, down from 19.5% to 16.3%.

It remains, though, exceedingly bullish about the prospects for online, convinced that sales will more than double by 2019, an average increase of nearly 18% per annum.

What will power this growth, they say, is the roll out of grocery click and collect to more locations, greater competition to raise standards since Morrisons entry ( a tribute to the strategy that Morrisons have adopted), lower delivery charges, and more delivery subscription schemes.

The projections seem optimistic.

For starters, growth rates in online grocery shopping are falling. Ocado, which is an online only retailer reported growth slowing from plus 18% in the first quarter to plus 12.6% in the second. They also reported a modest reduction in the value of an average order, down from £117.99 to £117.53. Sainsbury’s online sales growth has dropped to 10% in the last quarter. Tesco’s Philip Clarke indicated at a recent conference that their online sales at Christmas were growing at around 10%.

Secondly, the projection seems to ignore the various forms of competition that online faces.

There is internal competition as parent supermarkets invest in making their bricks and mortar stores more attractive places to shop.

There is competition from discounters who continue to see growth accelerate, and who, if they can pull off the trick of offering ever more up market food with rock bottom prices may exceed the near doubling of sales forecasted by IGD.

And the trend towards convenience store shopping shows no signs of stopping.

Thus the shopper is being offered an ever more attractive selection of ways to buy their groceries.

As they ponder the best way of feeding themselves and their family they will be working out what best suits them at a particular time. It may be they want to browse the shelves in a supermarket and see immediately the quality of what they want to buy. It could be that they want the lowest price possible, or maybe a trip to the local convenience store for speed. Or it could be that tapping a shopping list into their smart phone is the easiest way to shop.

In this increasingly multi channel world, online shopping can only grow at the high rates projected if the numbers of people shopping that way doubles (and they spend roughly what is being spent now), or the same number shop online as now and double their spend, or some combination of both. All of which looks stretching.

This is not to suggest that offering shoppers the opportunity to shop on line is a waste of time, for clearly it has its attractions.

Rather it is to suggest that any forward projections, particularly if they involve heavy financial investment, should take a realistic view of likely sales growth.

Click and Collect – A Way of Online Shopping that Works for Customers and Retailers

Click and Collect , the system whereby  the customer orders on line but collects from the store, seems to be gaining popularity with shoppers and retailers alike.

It is attractive to retailers because it avoids what is probably the most costly part of online grocery selling - no spending is needed on maintaining a fleet of vans, recruiting  staff to fill and drive the vans, tax, insurance, and ever escalating fuel costs.

 

Customers like click and collect because it is convenient - no waiting indoors for the shopping to arrive. Instead they can swing by the chosen pick up point at a time to suit them.

And so we see ASDA setting up Click and Collect in 300 of its stores, and Tesco trialling pickup points in car parks and schools.

There are though a few facts worth bearing in mind before rushing to invest in click and collect.

First, it is still a tiny fraction of the total grocery market. Online in total as a way of buying groceries is only projected to be around 7% of the market by 2018. Within that, 18% of shoppers claimed to have used click and collect in the last month, but, just 4% of online shoppers claimed to use only click and collect. (Institute of Grocery Distribution)

Secondly, having a click and collect facility does not guarantee loyalty. Click and collect shoppers have used at least three different retailers to shop with online in the last month, compared with two for the average online shopper. They are not wedded to click and collect, or even online, and regularly shop across different channels meaning that they are prepared to  buy from discounters like Aldi, or convenience shops, or conventional supermarkets.

On the other hand, Click and Collectors are attractive customers for retailers to win. They tend to be affluent, and be working parents with children still at home, so they are relatively heavy spenders. They are technologically inclined. 61% have a tablet computer versus 41% for online shoppers using home delivery, and 90% have a smartphone versus 74% for home delivery. This means that it is easy to contact them and send relevant promotional messages.

It is this high spending potential that retailers are chasing, and they are mindful that if captured it is likely to be a more profitable business model than standard home delivery.

According to IGD, click and collect as a way of shopping is showing “unprecedented growth”, and they are increasing their forecasts of how big it could end up being.

OnlIne Grocery Retailing and the Hunt for Growth

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. 

More Evidence That Food Retailers Need an Online Operation

Hardly a day passes without reference to the rise of on line shopping and how it will affect the retail landscape.

Last week we heard that Morrisons supermarket are paying £170m to Ocado for their depot in Warwickshire, a further £30m to license their technology, plus 1% of any Morrisons online sales and 25% of any cash profits. They also threw in £46m to expand the Warwick depot, and a contribution to Research and Development costs.

Whether one thinks that Morrisons are out of their minds to get involved with Ocado, whose business model is far from a successful example of how to compete in online grocery retailing, or whether your view might be that this is an excellent  move for all concerned, what is unarguable is that Morrisons felt so pressurised about the adverse impact of not being on line that they were prepared to pay handsomely for a way in.

Today the Centre for Retailing Research heaped on the pressure by publishing a report claiming that the percentage of sales made on line will rise from 12.7% in 2012 to 21.5% sometime between 2018 and the end of the decade.

They make the chilling prediction that the rise will result in a loss of some 316,000 jobs,  that total store numbers will fall by 22% from 281,930 today to 220,000, and that a further 164 major or medium sized companies will go into administration.

As ever it is the consumer who is driving the change.  Shoppers’ way of buying has changed out of all recognition in just a few years. Nowadays, having read up all the reviews about a potential product on line, they can choose to visit a store and buy then and there, (having just checked on their smartphone that the prices on offer cannot be beaten by a competing store).Or they can use the store to see what a product looks and feels like and then go home and buy online. Even then they have a choice – to have the product delivered to their home or, rather than wait in, to collect at a convenient specified outlet.

As to food, the Centre concedes that purchasing food online has not exploded on the same way as other sectors, but predicts that online food sales will rise from 3.7% today to 9.5% by 2018, largely driven by the supermarkets investing heavily in this way of shopping.

There are substantial obstacles to overcome. There are reasons why shoppers have not enthusiastically embraced the internet to buy food.

The IGD tells us that consumers are still worried about the quality of fresh food bought on line, and that this remains one of the biggest barriers. 2 in 5 shoppers want longer shelf lives on products but this alone will not solve it. The taste and look of fresh products bought online continues to be highly variable.

Reliable delivery times are also critical, as is confidence that what is ordered will be what arrives on the doorstep. 90% of online shoppers report that a reliable delivery service is a major factor in deciding which supermarket to buy from.

And of course, prices and promotions must at least match what is happening in the store itself.

Buying groceries on line is not yet the ingrained behaviour that is evident in other categories. Most people shop online every now and then. Others have a more regular approach. But very few buy weekly, and the number doing so is dropping.

There are many problems to solve, not least that online as a way of retailing groceries is much less profitable than via the store.

It would seem though that all involved in selling food need to factor in the online issues when they review their business strategies.

Online Grocery Shopping - Supermarket Giant Morrisons View on the Challenges

Dalton Phillips, CEO of Morrisons, speaking on Radio 4 about his company’s future prospects, has given a clear analysis of the challenges food retailers face when considering going into online grocery shopping.

The basic problem, he says, is that when it comes to online, the mechanics involved in the cost of shopping transfer from the shopper to the supermarket.

The shopper going to a supermarket pays the time cost of going round the aisles loading products into the trolley, the time cost of wheeling the goods out to out to the car and loading up, and  the time and transport costs of getting the product home. Should the shopper arrive home with the wrong products they have to lump it – no getting on the phone or computer to complain that what they wanted has not arrived, no “goodwill” compensatory money changes hands to soothe disgruntlement.

Once the shopper orders on line all of those costs pass to the supermarket. The supermarket has to have the staff to process the order, pick the goods, load them onto the van, deliver to the customer’s house, deal with complaints. They have to buy or lease the vans, and bear the petrol and insurance costs of going around the country to deliver. We know from various industry studies that the cost of processing an on line order is about £15. Yet the shopper pays about £5, less if placing a big order.

Dalton Phillips point is that someone has to pick up the tab for all this additional cost, and none of the options is palatable. The competitive jungle that is the grocery sector means that costs cannot be passed back to shoppers in the form of higher prices. Equally, a hit to profit margins is unlikely to please investors.

What Dalton Phillips perhaps has not accepted is that embracing online grocery shopping means a structural and permanent change to the way profits are made by the grocery trade. At the moment online is a small part of supermarket sales, and so the profit drain is largely disguised, but this will change if the sector grows as predicted.

 Morrisons may not have much choice in whether or not they offer an online service. On line is something that today’s food shoppers want and to ignore the trend is to risk being sidelined, perhaps not today or tomorrow but certainly in the longer term. British retailing history is littered with examples of big businesses which ignored trends, got stuck in the past and collapsed. Comet, Jessops and Blockbuster spring to mind.

The challenge for Morrisons and any other business developing an online facility is to work out how to adjust business performance to take account of the reduced profit margin which comes from an online presence.

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.

Multi Channel Retailing - Is It a "Must" For Success?

Multi channel retailing is business speak for offering customers more than one way to buy something be it a shop, mail order, online, or through a mobile phone. The concept is further confused by defining different types of shops as channels, so we have the convenience channel, the discount channel, and the standard mainstream grocery shop.

The words multi channel strategy appear in most major company reports and those not seen to be participating get criticised.

Morrisons supermarket has been lambasted because it is not represented in the fast growing channels of on line retailing and convenience stores, and this has led to a drop in sales and market share. On the other hand, Ocado which is solely available on line has been criticised for missing out on sales at peak periods because there are not enough hours in the day or vans available to deliver the increased amounts people have ordered.

Large retailers are investing £millions into multi channel development.  Although trialling food sale on line, and offering customers the opportunity to order online and collect in store, Walmart is putting most of its emphasis on opening stores – small ones in urban areas, medium sized stores for towns and more of the huge supercentres for which they are famous. Marks and Spencer has said that whilst web based channels are important they feel that stores will remain the core of their business.

New and eye catching digital developments are announced daily.  At Gatwick airport Tesco has built huge screens that look like a fridge and the idea is that holidaymakers waiting for their flight can scan products from the screens on to their phone, ping to Tesco, and have their groceries delivered immediately they arrive home again, cutting out the need to make a stop at the shops after a long tiring journey.

Certainly in today’s fast paced society there is something compelling about the notion that consumers must have a quick and easy way to purchase whatever time of day or night the urge strikes. The rapid growth of food shopping online, said by the Office of National Statistics to be 14-15% per annum compared with 3% for the market as a whole, and the explosion in ways to access the net whether through smart phones or tablets or the standard computer, seem to suggest that food retailers large and small should be seriously examining online retailing, or risk getting left behind.

Nevertheless, there are question marks over all this multi channel effort.  It is noticeable that whilst all retailers are keen to talk about sales growth, few mention profits, and indeed there is recognition among most retailers that online will never be as profitable as shops. There is little discussion of the different skills required to run different channels. And despite all the effort, the proportion of food retailing done through the internet remains small – around 2 or 3% according to Mark Price of Waitrose. Even mighty Tesco is estimated to have just 6% of sales made on line, and Sainsbury 4%. The fastest growing retailer of them all, Aldi, avoids online shopping possibly because the costs involved might mean they cannot continue offering the very low prices which makes them the success they are.

Anyone deciding to experiment with a new channel may first want to ensure that they are operating a secure, cash generative core business. It will be important to have the requisite skills in place, to capture all the costs associated with the new venture, to ring fence the investment and returns, and to accept that it will take time to achieve success.

Shoppers Further Batten Down Hatches in Face of Economic Gloom

According to the IGD’s latest research, 59% of shoppers say that their most important concern just now how much they spend. Not surprising given that since 2007 prices have grown by 14% compared with wages at 9%, the spectre of unemployment  looms and every day brings a fresh story of economic woe.

As Giles Quick of Kantar Worldpanel pointed out in a recent presentationto dairy and red meat levy boards, in the search for spending control, shoppers have two options - either buy less or pay less.

It is clear that they are following both routes.

Both IGD and Sainsbury in its recent results presentation confirmed that consumers are indeed buying less. Justin King of Sainsbury told us that shoppers are putting less items in their shopping trolleys, and he and the IGD pointed out that shoppers are making more trips per week in an effort to cut down on total spend by buying only what they really need, and minimising waste as less products are thrown out due to being past sell by dates or starting to shrivel in the fridge. IGD data shows that the percentage of people making 3 or more shopping trips a week has gone up from 39% to 49 % in just two years.

Shoppers try hard to pay less. For the first time since late 2009 sales of supermarket value lines are growing faster than their premium ranges. The amount of product sold on promotion shows no sign of decreasing and 40p in every £ is spent on deals. Supermarkets have recognised this trend to shopping around and responded. ASDA promises to be 10% cheaper than everyone else, Sainsbury have countered this by giving their shoppers a coupon at the till which refunds the price difference if a branded product could be bought more cheaply that day in Tesco or ASDA, and Waitrose have now pledged to match Tesco on all branded items except when these are on promotion.

Pricing at a “round pound” is another tactic being pursued to attract shoppers. ASDA first started the trend towards pricing goods at £1, £2 or £3, and such goods now account for 40% of their sales in categories where the tactic operates. Tesco and Sainsbury are responding by stepping up the number of goods they sell in this way.

Paying less encompasses reductions in fringe shopping costs. The effort to reduce fuel consumption has led to a rise in on line shopping, and buying from the local convenience store. Sainsbury recorded a 20% increase in online grocery sales in the past twelve months, and IGD tell us that 17% of people currently shop for groceries on line.

All in all it’s a story of hard pressed consumers who think that they will be even harder pressed in the coming months. 46% say their future spending will decrease a little or alot compared with just 15% who think their spending will increase a little or alot. And it’s a story of highly competitive retailers changing strategies, and coming up with innovative ways of fighting for every tenth of a point of market share.

Ocado Online Grocery Retailer – Profit is Sanity, Turnover Vanity?

Ocado, the up market online grocery retailer, has just announced a 25% increase in sales to £402 million but an operating loss of £14.4 million. Which is worrisome as this is now the tenth year in a row that the company has lost money, and indeed it has not made a halfpenny profit since it was set up by three Goldman Sachs bankers in 2000.

However, its enthusiasm is undiminished, it is confident it will move into profit sometime soon, and it plans to float on to the stock market after the general election, at a rumoured value of £1 billion pounds.

Might a few shares in Ocado be a good investment?

Certainly it does not lack financial muscle. In addition to the founding bankers, it has appointed to its board a former Reuters chief financial officer and a former vice chairman of KPMG. Before parting with cash though the investor might want to consider the following.

Ocado competes directly with Waitrose who have just set up their own on line service, but its products come directly from Waitrose in a tie up due to end in 2013. Even if the tie up continues its hard to see what Ocado can do to persuade shoppers to buy from them rather than Waitrose other than drop the price or up the service, both of which will be costly.

If the tie up does not continue, then the question arises of how Ocado with a turnover of £400m will have the same buying clout as Tesco, Sainsbury or ASDA who all run online services. It won’t of course.

Then we get to the way Ocado operates. Competitors fill orders in store then deliver locally. Ocado has a huge central warehouse to which all products are shipped, packed and then delivered around the country. It sounds very costly both on day to day running, and paying back the enormous amounts of money borrowed to set up the warehouse. And not very green.

Finally, the management team. It would be much more confidence building if Ocado’s banking founders had attracted onto their board someone battle scarred through hands on experience of running a real business either in food manufacturing or retailing rather then individuals connected with service businesses.

Its true that investment analysts are divided about Ocado with some saying that it takes time to build an online business, quoting Amazon which struggled for years to be profitable, and saying that online grocery shopping is a growth market with room for a competitor like Ocado.

A very long term investor could feel that its worth buying into as one of the major supermarkets might want to purchase Ocado themselves to give a premium arm to their activities.

The bottom line though is that after ten years there is no bottom line, just a further big loss.

It might be best to sit this one out.