There are plenty of people that have made plenty of money from the internet, but not many of them are grocers. At least to date.
Ocado provides the most conspicuous example. The company might well have a state-of-the-art warehouse, replete with 15km of conveyor belts that can handle 7,200 grocery crates an hour. It might well be providing order accuracy to boast about. It might well also have posted a 30 per cent uplift in sales in the 36 weeks to August.
But it’s never returned a pre-tax profit. That’s not necessarily unusual among dotcom businesses, many of which can come and go almost in the click of a button. And some of the retailer’s supporters suggest there is long-term value in the business. Again, there’s a but - Ocado is 10 years old.
It’s the retailer that everybody seems to want to succeed, but very few can actually see succeeding. So what does this mean for everyone else selling food online? If a business dedicated purely to selling through the internet is struggling to make it work, then what hope is there for the rest?
Well, if the hope is profitability, then not much, say experts. Shoppers spent more than £333 million buying fresh produce from online supermarket sites this year - an impressive 23 per cent more than the previous year [Kantar Worldpanel, 52 weeks ending 5 September]. In spite of that, “not many” online grocery operations turn a profit, according to David Gray, an analyst at Planet Retail. Asda and Tesco do, but at a total online level, including non-food items. Sainsbury’s doesn’t release any figures, while Morrisons has only just recently committed to an “internet grocery assessment”, having not previously sold online.
“Generally speaking, online grocery is substantially more expensive to operate than a non-food online business,” explains Gray, “and that’s largely due to distribution costs.” According to his estimates, delivery charges for online grocery should be around €10 to cover the costs, given the need for temperature-controlled compartments and a well-defined delivery window.
With margins already tight in retail, it’s easy to see why profitable online systems are proving difficult to come by. That’s why some of the smaller companies wouldn’t touch incentives like timed deliveries. For a business like Abel & Cole, which delivers organic food, it would be money down the drain. “If you consider that logistics is the biggest single expense, then why on earth would you want to double that by offering timed delivery?” asks
co-founder Keith Abel.
He says customers would take the option of a delivery window if they were offered it, but it doesn’t really add any value. In the warmer months, for instance, three quarters of the deliveries are made “before people are up”. And arrangements are made if no-one is in. “You wouldn’t believe the number of keys we have to people’s properties, garages and side-gates,” he says.
Another company that’s ensured its logistics don’t run away with it is Fruit for the Office. The business started in 2007 with a marketing stunt involving 50,000 apples given away for free at London’s Liverpool Street station. It now turns over £1m. And though the business, according to its director Daniel Ox, continues to grow “very quickly”, there are limitations when it comes to scale versus logistics. “It’s not worth us getting out of bed for an order worth anything less than £18.99. Some suppliers are trying to do it cheaper, but we’ve looked at it, and looked at it again, but it’s as low as we can go. You need that margin.”
He’s also looked at the potential of expanding past the M25, but for that he’d need couriers. There’s no profit margin in that and besides, the company works well when it’s in the driving seat. Indeed, that’s where Ox, like others, can foresee problems for Amazon.
The retailer, most famous for selling books and DVDs, surprised everyone this summer when it started selling groceries. Amazon’s success to date of course offers other online retailers a benchmark. Its transparency and customer review systems have been key. However, logistics could be its downfall.
Amazon sources fresh produce from third party suppliers, whichrequire separatedelivery fees, which in turn, translates to a fee of £7.50 for fruit and vegetables. These charges fluctuate depending on the third party supplier and would be payable to each individual supplier, explains Gray. “If a shopper picked up products from several suppliers they could, in theory, be charged several delivery fees. Considering other UK online grocery retailers offer a uniform delivery fee structure for the whole shop - normally between £3 and £6, though some have no delivery fees - this a real competitive disadvantage for Amazon.”
Mintel’s director of retail research, Richard Perks, says the idea is “half-baked”. He also points to the strong, established brands with which Amazon is competing - brands which have the benefit of stores. Indeed, selling food in 2D as opposed to 3D is not as straightforward as non-food. In a store, shoppers can touch, smell and sometimes taste before they buy. That provides the likes of Tesco with a distinct advantage over Amazon. “The store brand gives credibility to the online offer and the trust in the store transfers to the online offer,” says Perks.
Internet players thus have to trade on other strengths. As, for instance, Abel & Cole does. “We’re like UK Fairtrade,” Abel once said of the company he helped found over 20 years ago. The website today expands on this, with 10 differences between the box scheme and a supermarket. Taste and customer service are among them, but so is convenience: “A weekly shop takes under 10 minutes with us,” is reason number eight. Ethics still remain key, with its producers “cared for”.
“We don’t phone up producers and ask them how they can do something cheapest, we ask them how they can do it best,” says Abel. “What we’re not doing is discounting. If they connect with us, then people will be prepared to pay a premium.” A premium, of course, that helps provide a margin.
While there is no doubt the internet will provide more sales in the years to come - slowing perhaps as the market matures - the key issue will remain profitability. “It’s all very well having online sales growth or more if it’s profitable growth, but unfortunately for most retailers online grocery margins are razor thin,” says Planet Retail’s Gray. “That’s if they exist at all.”
BLUE SKY THINKING SEES ONLINE FIRMS REACH FOR THE CLOUDS
There’s plenty of untapped technology out there that could ensure commercial sustainability becomes a reality for smaller companies. Cloud computing might sound like something from the The Matrix, but it’s here - and it could revolutionise the food supply chain.
Trend-spotting organisation Gartner has earmarked the technology to really take off among small and medium-sized businesses. But what is it? In a nutshell, instead of having your own IT services, servers, etc, you access them through the internet a bit like you access electricity from the National Grid.
Richard Walters from supply chain consultancy Azurance says the technology could help create sophisticated trading hubs to put buyers and sellers in touch. “With only a PC and access to the internet, producers could offer their produce for sale, organise the transport logistics and get paid.”
Walters says there are plenty of opportunities for smaller businesses to find outlets that suit their own business models. Producers with farm shops could extend their offer and take online sales “really seriously”, while others could unlock other business-to-business outlets. Chefs, for instance.
Gordon Ramsay may have his own reputation, but chefs generally are often singled out by food distributors as “difficult” to deal with. They make last minute changes, expect everything “now” and seem to leave all communication down to a message left on an answerphone at midnight.
But things are changing. Fruit for the Office has recently started a new portal for foodservice, and director Daniel Ox has been “shocked” by the number using it. “Given their reputation, I’d thought we’d get about 10 per cent using the online service, with the remainder leaving messages on the phone or sending faxes,” he says. “But 50 per cent are using the website and 40 per cent are using email. It’s shocked me.”
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