At the turn of the Millennium I made a number of visits to Hertfordshire see John Browett, who was then CEO of Tesco.com, where the meetings would invariably involve conversations about Ocado and its dedicated fulfilment warehouses down the road that were kitted out with as much clever automation as could be mustered at that time.
In contrast, Tesco had chosen to utilise its supermarket network and adopt a store-picking model whereby in-store employees would pick online ordered goods from the shelves of the regular superstores. These internet orders would then be delivered locally to waiting customers at home.
The debate back then was whether Tesco was going down the right route with this model or whether it should be following Ocado and committing investment to warehouses dedicated to fulfilling the growing number of online orders. The company decided it would wait until the online volumes were sufficiently large as to justify the capital expenditure on building such an infrastructure. Although Tesco went on to open a few ‘dark stores’ for purely servicing internet orders it has never ultimately gotten around to copying the approach of Ocado with its warehouses and automation.
What’s intriguing is that more than 20 years down the line it is still not overtly obvious whether Ocado or Tesco made the right decisions with the routes they chose to take because neither approach to handling online grocery orders is proving easy to make profitable today. Within the space of a couple of weeks we have seen reports that highlight just how tough it is to profitably operate an online supermarket, regardless of which model is adopted.
Ocado Retail – a joint partnership with Marks & Spencer – recently posted a £4 million loss in its full-year results, with sales dropping to £2.2 billion for 2022, in what the group described as a “challenging year”. The drop in retail sales has been attributed to soaring inflation and weak consumer sentiment. This is leading to declining basket sizes, as shoppers have chosen value products and are buying less, as the cost of living crisis bites. This is fair enough but normality seems to be a thing of the past nowadays and there always seems to be something rocking the profitability boat for the company.
Meanwhile at Tesco, the ongoing challenge of driving profits with online grocery appears to have led to major frustration at the top level recently judging by the decision to introduce ‘fulfilment fees’ on its suppliers for goods sold through Tesco’s online store. It has been reported that suppliers could be hit with a 12p fee per unit on branded items and 5p on own-label products.
The company stated in documents seen by The Grocer: “Tesco shoulders the majority of fulfilment costs – serving more than one million online orders a week in the UK. We need to achieve a more balanced approach. This fee is essential as we work to fulfil more orders for our customers across the group and we are asking suppliers to engage on this request and support us.”
This provides yet further evidence that the online grocery model is still economically rickety. And if suppliers don’t cough up these new fees to help Tesco balance its books then there is the threat of their products being delisted from the shelves or some other painful penalty being inflicted.
Adding to the worries for Tesco and other online supermarket operators is recent research that found the store picking model for online orders was proving onerous for in-store employees and that this was leading to a negative experience for shoppers. As many as 39% of retailers analysed were found to be facing increased pressure to fulfil ecommerce orders and for 21% of customers surveyed this situation was leading to a lower level of service as store staff were too stretched by these online-related duties, according to Pricer. The report also found another 21% of shoppers felt store picking resulted in them experiencing delays at the checkout and 31% felt the aisles were cluttered with trolleys used for fulfilling online orders.
For all those retailers involved with online grocery I hope they don’t have to wait another two decades before it finally becomes possible for them to generate some sort of consistent profitability from their ecommerce channels.
