Jo Ronan had never made a online grocery before Covid-19. Now she and her husband Mike doubt they will return to a supermarket at least until next year.

“I haven’t been to a supermarket since March,” says Ms Ronan, a retired teacher who lives in Essex in the south of England and suffers from asthma. “I like to shop around. But until there is a vaccine, I can’t really see myself going back to a store. It’s too risky.”

Instead, the couple shop for casual items at a local convenience store and order bulky items online, at one of the UK’s Big Four supermarket groups. They are among the millions of people around the world who have tried online grocery shopping for the first time. coronavirus epidemic – and found that they like it.

UK, e-commerce it took two decades to go from zero to about 7 percent of total grocery sales. It then went from 7% to 13% in about eight weeks.

Even in parts of Europe that have lagged behind e-commerce, interest has risen sharply. Bain researchers estimate that German and Italian online grocery sales have doubled during the pandemic and now represent 2.9% and 4.3% of the total, respectively.

Simon Roberts, Managing Director of Sainsbury, says Covid-19 “dramatically accelerates participation in online grocery stores” © Toby Melville / Reuters

Sainsbury's delivery vans at a London supermarket branch in January

Sainsbury’s delivery vans in a London supermarket branch in January © Toby Melville / Reuters

But there is only one problem with the surge in online sales: Many supermarket chains are struggling to make a huge profit – and in some cases a profit – from e-commerce due to the huge commitment in resources that it requires.

Britain’s two biggest operators, Tesco and J Sainsbury, have both said they plan to make about the same profit this year as they did last year – despite a huge shift in food consumption from restaurants to the home and a exemption from property tax. One of the main reasons is the high cost of expanding online delivery operations.

Sainsbury’s chief executive Simon Roberts summed up the situation by saying that Covid-19 “is shifting sales from our most profitable local channel and dramatically increasing participation in online grocery stores, our least profitable channel.” Most supermarket groups do not publish detailed sales and profit figures online.

When e-commerce comfortably accounted for less than 10% of supermarket sales, improve profitability could undoubtedly be considered a long term project.

“The supermarket groups were hoping that slow adoption would give them time to find a less dilutive model,” said Marc-André Kamel, leader of the global distribution group at Bain. Companies now had to “find a much faster solution” to the low profitability of their online operations while at the same time “increasing their e-commerce capacity to meet growing demand”.

Column chart showing the struggle for margin in online grocery stores by channel and percentage model

No one expects online grocery shopping to return to pre-Covid levels. A study by UBS in the UK found that 71% of those polled said they would shop online “as often or more after the Covid -19 situation improves”.

Based on other survey data, Bain estimates that between 35% and 45% of the recent increase in online sales will prove to be permanent.

Tim Steiner, managing director of UK online grocer Ocado, which flourished during the lockdown, believes the long-term impact of the pandemic will be substantial. He points out that the group he founded has over a million people waiting to become customers once he has the capacity to serve them.

“We find that if people shop between three and five online stores in a 12-week period, their propensity to continue shopping online is very high,” he says.

“The whole world has also been made aware of pandemics and the transmission of viruses. Everyone is taking less risk than ever before, and it’s all about deciding where and when you want to take your risk. Do I take it to visit family and friends or do I take it to grocery shopping? “

Tim Steiner, chief executive of Ocado, believes the long-term impact of the pandemic will be substantial

Tim Steiner, chief executive of Ocado, believes the long-term impact of the pandemic will be substantial © Chris J. Ratcliffe / Bloomberg

An Ocado distribution center. Its own food retailing operations saw sales increase 27% in the first quarter, but profits were up almost 90% on larger shipments.

An Ocado distribution center. Its own food retail operations saw sales increase 27% in the first quarter, but profits rose nearly 90% due to larger deliveries © Chris J. Ratcliffe / Bloomberg

Automation problem

For many years, retailers have been put off by the capital expenditure and technical challenges of offering e-commerce for large-scale food purchases. The United States in particular was marked by the failure in 2001 of Webvan, a first online grocery business.

Even Amazon, whose financial might and technological innovation have disrupted industries ranging from books to electronics, did not seem to have a ready-made solution for much of the past two decades to the problem of temperature-controlled product delivery. to doors.

In the UK, the launch of Ocado in 2002 forced incumbent operators to act. Since it didn’t have a store of its own, Ocado went with a model built around automation from the start, building a large distribution center in North London. The lack of solutions available on the market has led it to develop its own systems and software to prepare orders and plan delivery routes.

Line graph showing weekly e-commerce penetration in percentage for various countries

Mr. Steiner points out that traditional supermarkets also tried automation initially, but were discouraged by the complexity of it, and reverted to picking customers’ orders in stores and then distributing them in trucks. .

This is the least efficient way to process orders. “You can polish the turd all day, but in-store choice loses money,” says Steve Hornyak, chief commercial officer of Fabric, an Israeli start-up developing in-store automation technology.

He added that having to pick orders from a store that is also overflowing with shoppers limits picking capacity to 100-200 orders per day.

An online order from Morrisons supermarket in Marsden, northern England, in April, during the nationwide lockdown

An online order from Morrisons supermarket in Marsden, northern England in April, during the nationwide lockdown © Oli Scarff / AFP / Getty

The additional costs of in-store pickup were compounded by supermarket pricing strategies for online services, which often involved the widespread use of promotional coupons and free delivery offers to attract customers.

“They launched at no cost, or with fees that were far from sufficient to cover the costs,” says Kamel. “They informed customers that the pickup and delivery was free when in reality it cost between € 12 and € 14 per order.”

His research suggests that grocers around the world typically suffer from a negative operating margin of around 15% on online orders. Even a $ 7 delivery charge doesn’t push that number into positive territory.

Line and column chart showing Ocado sales and ebitda margin from 2009 to 2019

The market has grown differently in the United States, where grocers’ lack of enthusiasm for e-commerce led to the creation of Instacart in 2012. Its independent buyers select customer orders and deliver them, with the customer paying an annual subscription and fee per order.

China has taken a similar path. The first start-ups tried next-day delivery of fruits and vegetables, while another wave of entrepreneurs tried the mid-level model similar to that used by Instacart, getting items from grocery stores to customers. The Chinese grocery delivery market includes e-commerce leaders like Alibaba, and Meituan, and start-ups like Miss Fresh, Dingdong Maicai, and Xingsheng Youxuan.

Miss Fresh embodies a new trend. Backed by funding Crunchbase puts in at $ 1.4 billion, it has built a network of small warehouses in 16 major cities with lower rents and fewer items than supermarkets.

Its pink-clad couriers on scooters deliver 60 to 70 orders per day while micro-warehouses can hold double the number of items in similar-sized stores, according to the COO. Cecilia sun. Ms. Sun said it takes three to nine months for each new warehouse to break even on its own.

But even though China has the advantages of densely populated cities and cheap labor, there is no indication that the country’s businesses have fully solved the profit problem. About 150 Chinese grocery delivery startups have failed in recent years, according to ITjuzi, a Beijing business information provider.

Mr. Hornyak thinks intermediaries are just a stopgap for large retailers. “If a grocer thinks Instacart is a strategic solution for e-commerce, he proclaims the death of his business,” he says. “You hand over the keys to your kingdom to a third-party data and technology company.”

China's grocery delivery market includes e-commerce leaders like Alibaba

The Chinese grocery delivery market includes e-commerce leaders like Alibaba © Qilai Shen / Bloomberg

About 150 Chinese grocery delivery start-ups have failed in recent years, according to ITjuzi, a Beijing business information provider

About 150 Chinese grocery delivery start-ups have failed in recent years, according to ITjuzi, a business information provider in Beijing © Qilai Shen / Bloomberg

Rational pricing quest

Supermarkets around the world have started to take e-commerce much more seriously after Amazon’s surprise Acquisition in 2017 of Whole Foods, a transaction that caused their stock prices to drop.

Those with the financial capacity have stepped up their investments. Walmart, the world’s largest food retailer, has poured money into home delivery and “click-and-collect” – or “kerbside” as it’s called in the United States.

Others turned to Ocado, which began licensing the technology it developed in 2014. Almost all of the deals with retailers around the world were signed after the Amazon deal was announced. Whole Foods. It’s now raise £ 1 billion through debt and equity to capitalize on the growing market.

Dave Lewis, the outgoing managing director of UK market leader Tesco, acknowledges that online operations have at best balanced in the past, but aims to change that with greater efficiency and more realistic prices.

“There is definitely an opportunity to be more commercially oriented in the way we price delivery,” he recently told investors. “Do I see a situation in the future where pricing becomes more rational? Yes.”

A wave of recent agreements between retailers and food delivery apps like Deliveroo and Uber Eats, many of which involve delivery charges for consumers, suggest he’s right.

Kroger, a large American supermarket chain who is an Ocado technology user, is counting on catching more expense. “When a customer first goes online, it usually takes three or four years for that customer to profitably from the same level as shopping in-store,” said Rodney McMullen, managing director. “But what we’re finding is that we’re getting a significantly higher share of this client’s total household spending.”

Three years after the agreement with Whole Foods, Amazon had a lot of experiments on how to use its vast infrastructure to ensure the delivery of groceries and offers a number of services to customers, including the sale of fruit and fresh vegetables. But it’s yet to make a decisive push into online grocery shopping, although most industry executives expect it to eventually.

Mr. Kamel says advertising is a major untapped revenue stream; just as brands pay for improved in-store promotion, they might pay a premium for better positioning on a website. He notes that Instacart derives about a third of its revenue from this source.

One feature of the pandemic – larger transactions – could also contribute to profitability. Ocado’s food retailing business saw sales increase 27% in the first quarter, but profits were up nearly 90% as they made fewer but significantly larger deliveries.

The other major lever is the reduction of the cost of realization. Ocado is building 54 robotic distribution centers around the world for its customers. These high-tech sheds can pick up a $ 100 grocery order in minutes, but their capital costs and lead times are significant, and they take a long time to reach full capacity.

Others prefer to build on what they already have. Mr Lewis says Tesco’s large number of stores means it is close to many customers, allowing it to increase deliveries without hefty capital expenditure. “Own [the] the last mile of our way is the important thing, ”he says.

The efficiency of in-store picking is gradually improving. But traditional supermarkets aren’t organized with quick pick-up in mind. They are designed to force customers to wander the aisles and make additional impulse purchases.

Customer in Denmark receives delivery from Nemlig online supermarket in May

A customer in Copenhagen, Denmark receives a delivery from the Nemlig online supermarket in May © Martin Sylvest / Ritzau Scanpix / AFP / Getty

Dylan Baird, Co-Founder of Philly Foodworks, Helps Crew Members Choose Items For Online Order In January

Dylan Baird, co-founder of Philly Foodworks, helps crew members choose items for online ordering in January © Bastiaan Slabbers / NurPhoto / Getty

“Explode with the controls”

One company that has completely redesigned this approach is Chinese company Alibaba, which has designed its 207 Freshippo supermarkets with delivery as a top priority, rather than a later addition.

Pickers often outnumber buyers in shops, also known as Hema. Glued to their portable devices, they rush between the shortened aisles to pick frozen dumplings, seafood and vegetables, and send the items whirring above shoppers’ heads on conveyor belts to a packing station at the store.

Orders are then delivered by scooter couriers, often in less than 30 minutes. “We’re exploding with orders,” says one passenger who earns 5.30 Rmb (0.75 USD) per order delivered. Growth jumped to over 100% year-on-year in the first quarter.

Automated micro-fulfillment systems that can run in stores and that are touted by companies like Fabric, Auto Store, and Takeoff are a less drastic alternative, attractive to retailers with a glut of store space. Mr. Hornyak says these centers can increase a store’s capacity to more than 500 orders per day and reduce picking costs by up to 80%. Tesco is already working with Takeoff on up to 25 of its UK store centers; the first one should start soon. Ahold Delhaize, the Netherlands-based retailer, has also deployed them in the United States.

Ocado builds 54 robotic distribution centers around the world for its customers

Ocado is building 54 robotic distribution centers around the world for its customers © Peter Nicholls / Reuters

Mr Steiner is skeptical, saying such systems are less efficient than centralized warehouses and much of the technology is unproven in a commercial setting.

But Kamel points out that micro-fulfillment centers can be set up in a matter of months – compared to up to two years for a large automated warehouse – and at a much lower capital cost.

And in recent investor presentations, Ocado emphasized that it can offer the full range of options, from giant centers handling 200,000 orders per week to compact centers that would fit easily into a large supermarket.

Its most recent license agreement, with Japanese retailer Aeon, committed it to supply a mix of different facilities. Other deals have even involved some degree of in-store selection.

The future of online grocery shopping increasingly looks like a mix of solutions: large automated facilities in large, densely populated cities, smaller ones closer to shoppers in more suburban environments, and a mix of store choices. or intermediaries in rural areas.

Mr Steiner believes that online grocery penetration could eventually reach 70 or 80%, with the market regrouping into a few giant Amazon-like players. If he is even half right, the need to solve the profit conundrum will become existential for many supermarkets today.

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