Working from home most days – as freelancers tend to – and with an office that faces onto the street (albeit a quiet rural lane) I have come to the conclusion that once the morning school run is over, rather more than half of the daytime traffic passing my window consists of home delivery vehicles.
As well as the usual forays by White Arrow, TNT, and the like, most days see vans emblazoned with Asda, Tesco, Sainsbury and/or Waitrose passing the door. Pollution and environmental issues aside, their regular visitations to my neighbours hardly seems to make for a profitable business model – especially as the nearest branch of each of these stores is between eight and 12 miles away.
It all made comments at the Multi-Channel Retail Show last month from Martin White – former supply chain director of Sainsbury and now an independent consultant and chairman of software company, Rangegate – all the more relevant. White argued the home delivery models adopted by the majority of the country’s grocery chains – acknowledged globally as leading the field in this area – are intrinsically flawed.
Defying economic gravity
‘Grocery is a low value, tight margin business,’ says White, ‘and it can’t really sustain the sort of costs involved in setting up standalone fulfilment models using dedicated warehouses – as Sainsbury discovered. Ocado really is defying economic gravity at present but it is achieving customer loyalty. The more prevalent store-based models raise issues of conflicting priorities as well as problems with cateringfor peaks in demand; inevitably most customers want their groceries delivered on Fridays or Saturdays.’
This in turn leads to reduced service levels as sought -after delivery windows fill up quickly and shoppers are forced to take despatch at less convenient times. And, as many of us have discovered, supermarket shopping on Friday or Saturday is now to be avoided at all costs: there is nothing more irritating than trying to navigate around lumbering home-picking trolleys laden with tote boxes, or more frustrating than seeing the picker just ahead of you clear the facing of items that were next on your own list.
Even so, for all the major grocery players efulfilment is still store-based, although closer inspection of those that claim to be profitable reveals some interesting accounting tactics when it comes to assigning underlying costs. A typical 150 home order, for example, may represent a nominal gross margin of 26 but the true costs of delivery could be as much as 30- 36 while the customer is charged only 7 for the despatch: at best the sale will make little contribution to overall group profitability.
With rapid growth in the number of delivery vans apparent to even a casual observer, a shared infrastructure would seem to be the most cost-effective and environmentally-friendly model. In the e-world there are already moves in this direction: Amazon, for example, handles despatch for Borders’ website from a common book warehouse. It would seem, however, to be totally impractical for the grocers with all those conflicting commercial interests, variable service policies, and a nightmare to manage the mishmash of returns and refused substitutions that build up during the course of any home delivery round.
The solution, suggests White, must be to move away from conventional approaches to supply chain and develop more radical solutions that will help to manage costs, improve customer service when it comes to payments and substitution, and provide a scalable future for grocery home shopping. A significant model here, he suggests, is Sainsbury’s approach at Sydenham where an adjacent warehouse has been built to manage picking for the bulk of home delivery items in a separate location. This helps to resolve stock allocation and priority issues and could be a cost-effective option when sales volumes justify the investment.
‘Retailers have to look at what feels right for the customer and then develop a service offering to match,’ says White. ‘Retailers will also need better forecasting and planning to bring substitution rates down, or if substitution is inevitable, at least better customer insights to choose items that matche the shopper’s preferences rather than the picker’s.’