Analysis

ANALYSIS How delivery is evolving in the online grocery sector

Adoption of online grocery shopping has accelerated rapidly during the Covid-19 pandemic.  In the UK, for example, according to Nielsen, online grocery spending more than doubled to £1.2 billion in the four weeks ending 16 May. Ecommerce accounted for 13% of all UK grocery sales, compared to 7% in the equivalent period the previous year.

Meanwhile, according to researchers at Bain, German and Italian online grocery sales doubled during the pandemic to account for 2.9% and 4.3% respectively.

The Covid-19 pandemic effectively meant that grocery retailers had to be online because footfall fell so dramatically. Established online grocers embarked on hiring sprees to boost capacity (Tesco hired 6,000 new permanent roles in the six months following March 2020) while companies with a less developed ecommerce infrastructure had to find unconventional ways to boost capacity.

Despite the higher volumes, this shift has not been particularly welcomed by the supermarkets, which have struggled to achieve profitability when selling online, primarily due to the vastly increased distribution costs.

Instead of shipping pallets of the same product to a store for customers to pick their own orders, online grocery means combining different types of products, usually including a mixture of room temperature, refrigerated and frozen goods.

As well as the additional costs inherent in picking the orders, distribution also has to transport the goods the final mile to the customer’s home, with the risk of failed deliveries.

To ensure profitability, grocers will need to maximise the drop density of routes. This will happen naturally as more customers shift to online, but the use of advanced route planning with a high level of automation will be crucial.

Walmart and Ocado show two different models for how distribution centres might be placed.  Walmart uses a micro-fulfilment model, in which smaller fulfilment centres are situated closer to the customers, while Ocado tends to use larger, more central distribution centres.

These models serve the “big weekly shop” model relatively efficiently, but what about the smaller “top-up” shops which until relatively recently have been taking a growing portion of retail? The Shopper Stock Take Index from Shoppercentric tracked a shift to “little and often” shopping in the years running up to 2018, reaching around 16% of shoppers abandoning big shops in favour of smaller, regular ones.

Handling distribution for this market will be proportionally more expensive and difficult to integrate into normal routes. This is why some retailers are working with third parties to handle this area.

Working with a courier app offers the apparent advantage of delivering a quick fleet which can deliver quickly. For example, Carrefour and Asda have worked with Uber. The company, which originally started as a ride-hailing service, benefits from being able to get drivers on the road and doing deliveries quickly. The recruitment process is essentially zero-touch for Uber: drivers simply sign up through a mobile app and can quickly begin making deliveries. Orders can effectively be fulfilled from any location.

The likes of Uber will struggle to support the kinds of volumes that carrier services are used to handling for retailers in an economical way. Uber says on its website that a driver doing a single 5.2 mile order could be paid as much as £6.70, which combined with the labour costs of preparing the order, would eat significantly into retailer margins or add a significant extra cost for customers. In addition, Uber drivers often use smaller vehicles such as motorcycles so will not be able to deliver the same number of parcels on a route as a courier van.

Other newer entrants to the online market are finding ways to avoid launching a last mile delivery operation. The retailer, the UK’s lowest priced supermarket according to Which?. has tapped into click and collect as a way of offering low-contact online retailing without having to absorb the heavy costs of fulfilling online orders. Aldi has also worked with on-demand courier Deliveroo.

Other novel approaches include launching new types of bundles, taking a lesson from the recipe box providers HelloFresh and Gousto. Morrisons, which was the last of the Big Four supermarkets to launch online selling, launched the “Food Box”, which is a £30 box of essentials delivered through DPD.  Customers get less control over what they receive, but for Morrisons the cost and complexity of fulfilment is much lower. This model has also been deployed by M&S and Asda.

With a return to normality still looking elusive, grocers will have to continue to squeeze efficiency out of supply chains to support online for a while yet.

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