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.