Is ‘clicks-and-mortar’ bringing the house down for grocery retailers?

trolleyIn my last post, I mentioned the importance of having tools like in-memory analytics to help find and exploit growth segments at this time when most markets are flat. Well here in the UK, on line shopping was the channel that kept most retailers buoyant over the Christmas season with some reporting that 25% of their revenue came from home delivery or click and collect.

Even the grocery retailers benefited from the trend but I doubt if any will be reporting major hikes in profits because the economics of on-line business for them look horrendous. It is estimated that picking, packing and delivering the average on-line order costs between £15 and £20 despite the fact that most simply charge £5, (and one even delivers orders over £50 for free). Now that’s probably fine for low volume, value high orders, such as champagne and caviar, delivered in high density metropolitan districts where the time and distance between stops is low. But for the cost of picking and delivering orders for the average family that live in lower density rural areas must be crippling – and you can bet that there are considerably more of these using the home delivery service as for them it’s good value – better than getting the car out for a trip into town.

Analysts estimate the UK market on-line groceries is worth £5bn and growing at 20% a year, so this sector can’t be ignored, but the more grocery retailers expand into it, the more they cannibalize the footfall passing through their capital-intensive stores where volume is reported to be falling at 3-5% annually. Talk about being caught between the devil and the deep blue sea!

Some of the newer pricing plans, such as the once only sixth monthly fee of £60 for all deliveries worth over £40 that one retailer is offering for home deliveries, shows they are battling with the issue. But it’s not likely to have much effect when the reality is they need to charging the customer far more for such a labor intensive service that has limited economies of scale. Rolling out a stratified tariff that better reflects the number of items in the order and population density of the customer’s address might also help but I doubt if that will happen though as complexity is something most retailers abhor.

So my first piece of advice is to divest your investment portfolio of grocery stocks as they’re likely to be on the slippery slope. But secondly, once you’ve discovered the magical growth segment, make sure you understand the cost to serve involved using solutions such as SAP Profitability and Cost Management to provide the insight into the complexity of how fixed and variable costs behave. Without it strategies such as ‘clicks-and-mortar’ could destroy value for you too.

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