Given that the cost of fulfilling an online order is approximately £20, and market willingness-to-pay appears to have an upper limit of £5 per delivery, it is obvious that a retailer in the UK loses £15 per online order.
Charging for Click & Collect merely addresses the ‘front end’ of this problem in terms of covering some of the real costs of the ‘final mile’. It also means that John Lewis’ introduction of a £2 charge for Click & Collect is possibly adding to the problem by giving the impression that a home delivery option is worth the £3 difference…
The hidden benefit of Click & Collect is that it drives footfall to stores, which can result in a cross-sell opportunity. Whether that is worth the difference between the amount charged and the cost of the service will vary between retailers, and also between shopper priorities (did the shopper choose Click & Collect because of the lower total cost of purchase or because it was more convenient/quicker?).
Meanwhile, for a Bricks & Mortar retailer in a virtually zero-sum flat-line environment, any scale advantages will be neutralised by the increasing redundancy of physical space.
The 2008 financial crisis has resulted in a growing realisation by retailers that the old 80/20 rule has found expression in a new superstore dynamic – 80% of sales come from 20% of the products stocked in a typical supermarket – and is focusing stock market attention on major retailer ROCE performance.
Moreover, as Tesco CEO Dave Lewis stated at a recent IGD trade briefing, 20% of the SKU’s in a Tesco Extra store only sell 1 pack per store per week. All of this has caused Tesco to announce its plan to cull 30,000 SKUs from their range of 90,000 SKUs in the next 18 months, in an attempt to eliminate product overlap and duplication in order to simplify their in-store offering.
However, the real re-set shock for suppliers has been Reuters’ recent announcement that Tesco has already eliminated 20% of lines, following an assessment of 15 categories to date…
In addition, with current rates of large space redundancy exceeding 20%, the economics of selling off ‘spare’ space – at a rate that forces buyers of the property to achieve sales intensities of £1,000/sq. ft.+ to justify the investment, the resulting property ‘lock-in’ prevents major retailers from scaling down to the smaller, closer-to-home convenience outlets demanded by consumers shopping more often, in smaller quantities.
This restructuring of the new UK retail trade environment has to result in a gradual loss of market share from Kantar’s current levels of 73.5% for the Big 4 Grocers, to a combination of the discounters, Waitrose, online and emerging formats.
With Click & Collect growing at 20-30% per annum, the real issue for retailers is that the growth of their online business not only cannibalises their regular in-store sales, generating more redundant space, but also causes them to lose more money as online sales increase.
Thus, whilst there is obviously increased demand for online service, the potential growth will be constrained by very real and practical limitations arising from the retailers’ offline business.
Incidentally, even if the Big 4 grocers maintain their fair share of online growth, online success does little or nothing to address their bricks & mortar surplus space issues… This has to result in losses in market share for the Big 4 – the only issue is the point of settlement.
Meanwhile, Amazon and other pure-play online retailers will grow at the expense of physical players until a point is reached where even their growth is limited by consumers’ refusal to pay adequate rates for order fulfilment.
For suppliers, this means that having managed to neutralise some of the business pressures caused by retailers’ excessive demands that resulted in GSCOP, these suppliers may be unconsciously accepting the even tighter ‘harness’ demanded by new major retailers in the pure-play online route to consumer…
In other words, with the benefit of hindsight, it might be wise for suppliers to anticipate, prepare for and negotiate fair share dealings with online retailers from the start, rather than depend upon a Mk2 GSCOP rescue, sometime in the future…
