This is a change being led by customers, and retailers have little idea where
they are going.
Take food retailing and Wm Morrison, the supermarket chain, for example. When
chief executive Dalton Philips arrived in 2010 the retailer did not sell
food online because it doubted whether it could make a profit via the
internet. This is because digital retailing strips out some of the
fundamental reasons why supermarkets in the UK exist in the first place.
The beauty of the self-service supermarket is that, following its creation in
the 1950s, it shifted the costs of two of the most expensive aspects of
grocery shopping – the collection of goods and their transportation back
home – to the customer.
Internet retailing puts these costs back on the retailer, instantly putting
pressure on profit margins.
Marks Spencer says it has no plans to sell food online because, to make
money, the average order size from customers would need to be between £100
and £120. This is far higher than the typical MS shop.
However, with Morrisons under pressure from falling sales, the retailer risked
losing more customers to rivals already offering an online service.
So, last week, Morrisons unveiled a plan to launch an internet grocery service
using Ocado’s automated warehouse technology.
Morrisons and its boss Philips had spent three years looking for the perfect
online model, so they should have known all the options for a viable
structure before choosing Ocado.
However, the City was split by the decision to such an extent that one analyst
– Clive Black at Shore Capital – said he was “bamboozled” by Morrisons’
actions.
Morrisons argues that Ocado’s warehouse in Dordon, Warwickshire, is the most
efficient mode of picking customer orders but Black, a long-term sceptic on
Ocado, argues that the model will add unnecessary distribution costs.
For example, a customer living on the Wirral in Merseyside has five nearby
Morrisons supermarkets where they can shop. However, if that customer were
to place an online order from their home, the Morrisons products would have
to make the long journey via suppliers, the Ocado warehouse, a delivery
spoke in the North West and, finally, a Morrisons van.
Clearly, it is an enormous challenge for Morrisons to make more profit from
this customer’s online order than if he or she had visited a local
supermarket. However, if the company does not offer an online service, it
risks losing the sale altogether.
This dilemma was at the heart of the lecture given by Tim Steiner, the boss of
Ocado, to the British Retail Consortium on Wednesday night.
His conclusion, in short, is that retailers with lots of high street stores
are facing Armageddon.
Steiner outlined a world where Ocado and other online-only retailers are the
modern day John Sainsbury, Sir Ken Morrison and Sir Terry Leahy.
Just as these figures led a change in where British families bought their food
– from local butchers to self-service stores and then to large out-of-town
hypermarkets – now Ocado is leading customers into the channel of online
food shopping.
Sainsbury’s and Tesco dominated the market by creating a more profitable
business model than their rivals, and so too has Ocado, according to
Steiner. This is because it can offer customers a bigger range of products
without the huge costs of a supermarket estate, which includes rent,
business rates and energy bills.
At present, online food sales in the UK account for a world-leading 5pc of the
market. Within 20 years, Steiner predicted, this could reach 60pc.
However, Ocado’s online-only business model remains unproven. The company,
after 13 years in existence selling Waitrose’s upmarket groceries, is yet to
make a profit.
Its doubters claim that the company, despite heavy investment in technology,
cannot match the efficiency of a supermarket in distributing products to
customers. Stores, after all, have been deliberately built in areas with a
population full of potential customers, while Ocado spends millions on
sending its vans from house to house. Is Ocado’s technology really worth
more than a supermarket’s rent bill?
Traditional retailers such as John Lewis, Tesco and Argos are trying to cash
in on this advantage by using the stock in their shops to fulfil online
orders and also using stores as a hub for customers to collect orders.
Multi-channel retailing, or omni-channel, as John Lewis calls it – the idea
that the most valuable customers are the ones that shop in stores and on the
internet – has become the biggest buzzword in retailing.
In his lecture, Steiner’s counter-argument was that the term “multi-channel
retailing” has been driven by companies trying to justify their vast store
portfolios. The only way efficiently to distribute online orders on a large
scale is with a warehouse, he argues, and you do not need a giant
supermarket to run a click-and-collect operation. “If you want a place in
London for the night you would rent a hotel room, you don’t buy The Savoy,”
he stated. Traditional high street retailers, he explained, are like a
farmer trying to use their car to pull a plough around a field, rather than
swapping it for a tractor.
Whether Ocado proves to be the future, or its model proves as flawed as a
tractor-less farmer, remains unknown, because further technological
developments outside the retail industry will create even more upheaval that
businesses have to keep up with. The introduction of 4G, for example, has
the potential to bring wifi-like browsing speeds to mobile devices anywhere
in the country.
How customers adopt this technology will be crucial to retailers. Therefore,
Sir Stuart Rose, the new chairman of Ocado and the former boss of Marks
Spencer, gave a different twist to Henry Ford’s quote when he spoke at a
supplier conference last week. “The customer is no longer king,” Sir Stuart
said. “He is master of the universe.”
Higher costs: The price of prepaid packages have risen. Photo: Glenn Hunt
