Alan Braithwaite, Chairman of LCP Consulting, discusses grocery e-Commerce and the U-Turn project.
There were around 75 million retail e-commerce grocery orders placed in 2014; by 2019 that is forecast to grow to 170 million with revenues of £17 billion, a compound growth rate of around 17%. Only the discount and convenience retailers are enjoying such numbers; of course, both areas of growth are cannibalising conventional outlets.
The growth presents a strategic conundrum for both retailers and policy makers and their planners. All the commentary points to retailers making little or no profit from the growth while the press and policy makers are demonising the vans that make the deliveries. The growth in home deliveries is attracting media and policy commentary; Business Reporter Online trumpeted on February 4th “Boris Johnson urges more ‘click and collect’ centres to reduce London congestion”.
Click and collect has indeed taken off for non-food with on-line growth of 15% translating into only 7% growth in the parcels sector, as the remaining parcels are collected from stores or collection points. Food is more difficult because of the requirement for temperature control, handling returns, and managing restricted goods. Customer preferences are also different for the bulky food shop which is more difficult to collect on the fly; but it is clear that click and collect for food will have to develop to accommodate the huge growth that is forecast.
We have been working on the conundrum with the logistics academic team from Cranfield School of Management focusing on new models for food logistics in cities; the U-Turn project is funded under the EU Horizon 2020 programme and can be found at http://www.u-turn-project.eu/. The concern of the EU is to minimise the societal impact of food logistics in our increasingly congested cities through the identification and promotion of new operating models. Part of that work has been in-depth research into the grocery e-commerce market and the relative offers of the UK retailers. Along with some cost analysis, it has turned up insights which point to current methods being financially unsustainable in the face of growth to 170 million deliveries. This is the equivalent of one house in 7 getting a grocery delivery every week!
Firstly, it costs around £20 to pick and deliver a grocery order. With the average minimum order standing at £40 including delivery charges, there is no way that minimum orders can be profitable. The basket size to cover the direct costs of fulfilment needs to be in the range £60 to £70 and the average basket size is between £80 and £112; after all the other costs are added in, net margins are very slender.
Second, the market is normalising on one hour delivery windows with customers being allowed a period of two hours during which their slot is protected while they complete their order. Cut off times for orders for the same day and next day vary considerably and some retailers offer delivery between 06.00 and 23.30.
Third, the constraints on van capacity, shift times and routing means that many retailers are running two routes per day per van with each van making between 15 and 20 deliveries per day; the vans are heavy and cannot take much more than 20 drops and stay within legal weight limits. Because of customer preference for mid-morning or early evening delivery, retailers use delivery charges as well as slot availability to ‘encourage’ customers to spread the workload. This further erodes operating margin and does not appear to fully re-balance the workload.
Our previous modelling experience points to very limited cost reduction potential from increasing drop density – in simple terms the volume growth is unlikely to fix the challenging economics. Indeed the probability is that competition will make the commercial picture worse. In the non-food sector, click and collect has taken between 30% and 60% of e-commerce volume bringing lower costs for retailers; food retailers have recognised this potential and have been testing different solutions.
These include locating at Tube stations, installing temperature controlled lockers, putting vans in car parks and autonomous collection pods, on which investment by ASDA appears to have stalled. Questions of food safety and delivery security mean groceries are more difficult than non-food but the economic imperative is to increase contribution from e-commerce growth. Emerging technologies, including fully automated systems, and new business models, including tighter collaboration with local authorities in major cities, will play a role in the future of grocery e-commerce. The alternative is long term financial disappointment and the potential for unwelcome regulation. Follow U-Turn to watch this space! @UTurnEU