Tuesday, September 19, 2017

Heading for a sea-change in UK online grocery

Daniel Lucht

Daniel Lucht

The UK online grocery sector is highly innovative and disruptive – and it provides a template to the rest of the world. Online is – hard discount and convenience apart – also the only channel with meaningful growth in UK grocery at the moment.
However looking forward, a number of big changes and challenges threaten upheaval. The first is a change in rankings, the second 1/2 hour deliveries and the third Brexit. After a couple of relatively quieter years for online grocery, the next 2-3 years promise radical change.
1) We forecast a change in rankings.
Only a number of years ago, Ocado, the only pureplay among the multichannel chains, was derided as a start up whose name started and ended in “o” (the same as its profits). The opprobrium the company attracted was astounding, as were the negative predictions. Some analysts speculated that, after the expiry of the non compete clause, a dedicated Waitrose online offering would spell the end for Ocado. Similarly there were suggestions that Amazon should buy the company to “put it out of its misery”, which also always made little sense (but that’s for another blog entry).
Fast forward a couple of years and a radically different picture emerges.
Apart from having become profitable, having managed risks around its Waitrose supply dependency with the Morrisons deal, and a pivot to service provider, there is another milestone in the retailer’s sights.
We think that Ocado could become a bigger online grocer by sales than Asda early next year and so challenge for the number two spot in UK online grocery. (Yes that’s right Sainsbury’s has already been overtaken, by a twenty years odd start up)
This change in ranking could reflect two different things. It could mean that Ocado’s centralised model has proven more efficient and economic – even before its new robot operated hive warehouse is operational. Or it only means that the established multichannel grocers have refrained from chasing online growth for the sake of it and cut back on promotional spend. Ocado’s rise has then coincided with the major grocers firefighting Aldi and Lidl and healing self inflicted wounds (Tesco).
It’s probably safest to assume that Ocado’s growth is a result of a mixture of both. That said, notwithstanding all the noise around click & collect, which hasn’t caught on in food to the same extent as in non food – Ocado’s success shows that the store picking model is not the way to go in future. Why pay staff to replenish store shelves only to pay other staff to assemble online baskets from the same shelves? This simply adds an unneccessary and costly extra step.
What does this mean for Tesco, Asda and Sainsburys? It means that big investment into DCs and logistics set up, goods to man systems, semi to fully automated picking, robots etc are required, all against a tough macro-economic background going forward.
(Just as an aside, such a realisation how to make online grocery work profitably would also play into the hands of late entrant Amazon)
2) The second change is fast delivery
That said, there is one scenario where in store picking will remain to make sense going forward and that is for super fast deliveries. Here the store acts as a hyperlocal depot to fulfill urgent orders from.
This will probably remain a niche for a while. It’s unclear how successful 1/2 hour deliveries in food will be and whether there are enough use cases. As basket sizes in general and convenience/top up shopping become more of the norm, is ultra fast delivery the right answer?
While we cannot say for sure how big this segment will become, it seems clear that super fast deliveries and rising shopper expectations will force another change on business models in online grocery. Again Ocado is interesting, as it has created an Instacart style offering alongside trialing driverless cars.
Obviously Amazon with its Prime Now service – with the integration of Wholefoods and Morrisons products – looks most likely to steal a march on this. The Amazon offering is also the reason why Tesco and Sainsbury have launched their fast delivery trials in London.
And while we are on Amazon… Providing the most professional platform the pureplay and its marketplace could become the choice of route to market for many FMCG companies. It has the potential to truly change the nature of the game once again – it will have the most innovations, most regional and niche products, and the most affluent shoppers. (Again more here https://www.linkedin.com/pulse/5-reasons-why-amazonfresh-success-eu-daniel-lucht)
3) The third change: Brexit
The final change we forecast is the hardest to call: Brexit.
On one end of the spectrum, as far as scenarios are concerned, lies catastrophy. Nightmarish scenarios could become reality in a no deal scenario, disruption on the ports and at the borders, gridlock caused by operation stack, shortages, out of stocks … no more Spanish courgettes or avocados, Dutch or Irish farm produce etc shortly after Brexit day. This is of course the scenario that needs to be avoided.
That said, even in best case scenarios a degree of disruption is to be expected. If challenges and disruptions happen, then the multichannel players will try to protect their store operations and make sure the core business is shielded as much as possible. Online as a smaller part of the business will not be the priority. The online only players are then in a better position to switch shoppers to their service, as they don’t have a B&M legacy to consider, and hence should have fewer out of stocks online. This will become a challenge for the supply chain to negotiate.
In conclusion, after a couple of relatively quieter years for online grocery, the next 2-3 years promise radical change

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