FMCG ECoMMErCEHow UK GroCErs lEad tHE way

By tim reayHead of Grocery

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inTroducTion Kantar recently published a fascinating report called Future of Ecommerce in FMCG*. It details the global adoption rate of ecommerce in fast-moving consumer goods. The differences in adoption are stark. While growth is substantial across the globe, overall adoption levels are very different from one country to the next. South Korea, a technically advanced country, may be an outlier with 16.6% ecommerce share. Japan, France and the United Kingdom are all operating at nearly 7% share, with little sign of slowing growth.

In contrast, consider the huge potential of the sleeping giants. The United States sees just 1.4% share, and Germany, only 1.2%. There are fantastic rewards for retailers and FMCGs who can get ecommerce right in these markets. Why are they lagging so far behind, and how can they catch up?

First, let’s look at the uK. Let’s consider why it can deliver 6.9% ecommerce share. What has driven this rate of adoption? What can other markets learn from it?

If we consider the landscape outside beauty products, FMCG sales in the UK are dominated by the big online grocery players: Tesco, Sainsbury’s, Asda, Morrisons and the pure-play Ocado. Amazon may have delivered newspaper headlines with the launch of Pantry and Fresh, but it doesn’t represent anything substantial in the market just yet.

When we look at the development and success of these retailers in the UK market, there are four primary reasons for their continued growth over the past 10–15 years, and the profitability of their operations today.

Over the following pages, I’ll consider each of these reasons, and what they mean for other markets. I’ll also propose how retailers should react to capitalise on the opportunities offered by ecommerce.

aBouT The auThor

Tim brings a strong combination of strategic vision with a realistic grasp of practicalities, helping grocery retailers to exploit limitless potential and gain optimum value from ecommerce. He joined Salmon after 13 years at Sainsbury’s, the UK’s second largest grocery retailer. His contribution was instrumental in taking its online presence from an ambitious start-up to its current position.

Tim reay Head of Grocery, Salmon Ltd.

* The Future of Ecommerce in FMCG by Kantar Worldpanel (2016)

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1. The consumer baseRetailers need to have an interested and enabled consumer if they are to succeed. Looking specifically at online grocery, they need a digitally aware, connected consumer with access to a good level of infrastructure.

For over a decade, the UK has consistently topped technology adoption league tables, coupled with a strong interest in online shopping. Consumers have always been willing to try ecommerce across all industries.

This is supported by the UK’s digital infrastructure. While it’s often maligned, it does provide a base level of digital access to the vast majority of the population via smartphones and domestic broadband. This digital accessibility has been an enabler for the growth of ecommerce. In the future, we may need to factor in access to superfast broadband and 4G services, too. This combination of consumer interest and good infrastructure allows retailers easy access to consumers.

Compared to a country such as Germany or the United States, consumers are also more densely populated, so home delivery is a viable option in many areas. It’s important to note that this is not universal across the country; many parts of the UK are more challenging to reach. But the bulk of the market is accessible.

*that’s Tesco, Asda, Sainsbury’s and Morrisons

2. competitor landscape of the uKAn interested, enabled consumer base is important. Equally, so are interested, enabled retailers. This is where the UK’s unique market position gives it a big advantage.

The UK is dominated by a small number of very large national supermarket chains, all vying for space in the market. This is very different to other markets around the world. Every retailer is looking for bottom line sales growth in a compact market. Every time annual results come out, shareholders and the city want to see signs that the business is getting bigger. It’s the ultimate sign that consumers are happy.

In the UK, the market is saturated with bricks and mortar supermarkets, particularly those owned by the big four. In tough economic times, these retailers have found growth in two areas: a huge expansion of convenience stores, and huge growth in online grocery sales. (It’s interesting to note that these are the two avenues that Morrisons decided not to pursue.) Getting good levels of growth from these ‘channels’ can be much easier than trying to switch shoppers from one of the other big four competitors.

Key reasons for the growth of the uK Big Four* since 2000

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If you look at the US market, it is very different. Albertsons is a grocer selling $60bn a year, ranked number 3 in the US. And yet in a company presentation on strategy that I attended, there was not a single mention of ecommerce. This really threw me – why would a huge retailer not be looking at growing ecommerce? The answer came when they put a map of their store estate on a screen. There were huge swathes of the US where they had no stores at all – no market presence.

Albertsons has a choice around growth. It can invest in ecommerce, which could be high investment and risk. Alternatively, it could buy up a chain of stores in one state, and get guaranteed sales through those stores. Regional players saturate the market in the US, and have many options about how they look to grow.

Consider Germany, also a slow adopter. Its big retailers, Aldi and Lidl, are generating sales growth through successful international expansion in the UK and the US. UK retailers tried that option in the 1990s, but many got their fingers burned.

So the competitor position in the UK, and slow overall economic growth in the last decade, means that retailers have limited options to generate growth. Online grocery is a prime option to deliver it.

3. external provocationOcado is critical to the growth of the UK online grocery market. It’s probably the biggest pure-play grocer in the world, and certainly the most successful; Ocado is now taking over £1bn a year.

Ocado is important, because it has been an ever-present in the market, spurring on the bigger supermarket chains. The US had its version of Ocado, Webvan, but it went spectacularly bankrupt. This made many retailers pause and think again around online grocery. Ocado kept going, kept innovating and kept up the pressure on the big supermarkets to keep investing and improving their offers. No retailer can ignore a competitor taking a £1bn a year, especially when it’s targeting a premium tier consumer base.

Back in 2005, no grocer was making any money out of online grocery, and many were likely to be losing substantial amounts. Had Ocado gone bust at that point, it would have been very tempting for the supermarkets to step back from the online market, and not encourage further growth. Ocado’s continued presence ensured that this was not likely to happen. It ensured the grocers developed profitable, sustainable online offerings.

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4. evolution and revolutionLike any business, online grocers have to evolve both their consumer offer and their business model to stay successful.

The UK market has continued to innovate and reinvent, driven by competition. Today the market is dominated by delivery passes offering unlimited deliveries for relatively low fees. This locks in the retailer’s consumer base, but it also means consumers are likely to shop more frequently with smaller basket sizes. The business model has to evolve to keep pace.

Innovations have come and gone. Most of the grocers had picking centres, or dark store operations* around 2000. Many of those were closed down. Retailers simply couldn’t make them work, either operationally or profitably. We now see that trend reversing. Sainsbury’s is the latest retailer to open a dark store operation in London. The technology to deliver these operations successfully now matches the ambitions of the retailers.

For future growth and success, retailers must move with consumers, and drive them forward. This means offering an easier, more integrated experience.

* a retail outlet or distribution centre catering exclusively for online shopping

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Beyond the uK, how can retailers succeed in ecommerce?In the UK online grocery sector, we’ve already seen that the UK has developed to 6.9% online market share. The US and many parts of Europe enjoy less than 1.4% market share. This raises some interesting questions:

■ What’s the implication for other markets?

■ How should retailers react to ensure they capitalise on the opportunities ecommerce offers them?

■ Why should the development of the UK market be of interest to retailers in other countries, if so many factors are unique to the UK marketplace?

Whilst every market is different, there are key learnings from the UK that are applicable to markets around the world.

First mover advantageTesco holds a dominant position within the UK online ecommerce landscape. Its overall market share hovers around 28%, while Sainsbury’s comes in second with 16%*. Looking at online grocery, Mintel reports Tesco to have a market share of nearly 40%, with Sainsbury’s at 17%.

This online dominance dates back to the early 2000s. While other retailers hesitated about how to aggressively expand online services, Tesco pounced. Competitors have struggled to catch up ever since.

Online grocery supports a first mover advantage. Often, consumers are guided by lists of their previous purchases – their ‘favourites’. The more someone shops with a retailer, the more complete that list becomes. It enables the retailer to personalise the experience to the individual’s needs.*Source: Kantar Worldpanel 2016

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Online grocery is a fiercely competitive market, and retailers offer generous discounts and vouchers to tempt consumers to switch. But when consumers do try other services, they start from the very beginning. They are on an unfamiliar website. They need to build their favourites list from scratch.

UK supermarkets are trying to combat this with ‘import your favourites’ features, which lets the consumer move Tesco favourites to Ocado or Sainsbury’s. Yet that first shop on a rival website remains a challenge, and compels many consumers to stick with the service they are familiar with.

(As an aside, if you want to read about a phenomenon that’s set to lock the consumer-retailer relationship even further, download the Salmon report on Programmatic Commerce).

The polar opposite to Tesco’s position is Morrisons. It failed to recognise the potential in the ecommerce market, and did not enter until 2014. When entering, it partnered with Ocado, which provided technology and operational expertise. This arrangement was purchased at an extremely high fee, to the benefit of the Ocado share price.

In many ways, there was little choice for Morrisons. By the time it launched, it was more than a decade behind its competitors. It required an instant solution. However, it’s doubtful that Morrisons can ever recapture its natural market share online. Many of its instore shoppers are already online, and happy with their chosen competitor. Perhaps this is why Morrisons is looking to other opportunities, such as the Amazon supply agreement in early 2016. (More on this here).

The advantage of the successful first mover is likely to demonstrate itself around the globe.

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new players shift the goal posts Retailers outside of the UK are concerned about the profitability of online grocery shopping. Can it ever make money? Will it dilute the business’s margins?

The UK demonstrates that profitability is achievable. It’s crucial that retailers understand their path to a profitable operating model, but solely focusing on margin maintenance may miss bigger shifts in the market.

In the late 1990s, there were book shops on every high street. Those bookshops would have been considering their online strategy and margin erosion, and were almost certainly concerned about making less money. After all, if a book shop has to post books out to the consumer for free, it’s going to cost the store more money.

Unfortunately for those high street book stores, there was a new player in town. It didn’t care about making as much money as its competitors made in the past. All it cared about was whether it would lose money. And, crucially, it cared about whether this was something consumers were looking for. Introducing: Amazon.

New players in a market do not necessarily care about margin erosion. They haven’t got a pre-defined requirement for a margin of 3% or 4%. If new players think that they have something to offer, and it could make some money, then it’s viable. Even if new players lose millions in the early years, they can keep pressing on, as long as investors see potential.

This is effectively what Ocado has done in the UK. It was losing money, year after year, but convinced investors through great sales growth and a plan to sustainability. In many ways, the financial break-even has come through being a technology reseller as much as a retailer. In doing so, Ocado has moved the goal posts for grocers.

Here’s the lesson for retailers. You cannot solely focus on maintaining traditional markets and margins. Consumers change. Business models have to move with them to remain viable and relevant.

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sustainable business models While retailers should not obsess with margin, it is crucial that they do have a realistic and sustainable business model. The UK is demonstrating that online grocery can make money, even when dominated by home delivery. And it can also have a positive impact on overall business.

The path to a sustainable model can be a rocky one. It requires investment and commitment. In the US, we often see access to online services provided for a set fee per order. Software as a service (SaaS) is the obvious example. This can be attractive for a retailer, at least in the short term; there is no large upfront fee, and the business gets a base level of performance instantly. It can even partner with a company like Instacart to deliver the goods.

Long term, this model is unlikely to be sustainable. Food retail is a relatively low margin business. If a retailer gives away a flat percentage of sales to third parties, profitability could be an issue. This is particularly true if the third parties will look after media investment through your website. Retailers need a business model that allows growth to be rewarded with efficiency savings. Every retailer needs to be able to differentiate itself too, and put its retail brand stamp on the proposition. It needs to control the consumer offer.

At a trade show in Chicago last year, I was asked by one retailer whether, as part of Salmon’s service as technology provider, we would also deliver the orders to their customers. I’m sorry to disappoint anyone who thought we would do this! Salmon’s aim is rather to equip retailers with the technology to serve their own customers. The collection desk attendee, or delivery driver, is the sole interaction an online shopper

has with a retailer. That person is the face of your business. If a retailer doesn’t want to own this process, then what is its role? Within the UK, all retailers own the execution of their online grocery propositions, except for latecomer Morrisons. Retailers are service providers and, more than ever, this is true in the online grocery world.

play to your strengths In a digital world, supermarkets have a key advantage. Each one has a store in every neighbourhood. Each store is full of stock, and thousands of consumers are coming through the doors every day.

This gives supermarkets a huge advantage. It also explains why store-based ecommerce dominates the UK market. Retailers only tend to operate dark stores* if they are running out of capacity.

Physical stores are a fantastic vehicle to promote an online brand and wider services. They ensure that stock is located near to the consumer, ready for collection or delivery. Using existing physical estate also utilises the cold chain** that has been perfected over decades. This ensures online is an opportunity for growth, not a threat to sales.

By embracing physical stores, these retailers have a massive advantage over an online specialist like Amazon. Groceries and books are very different products. Retailers can’t easily pop groceries in the post for someone else to deliver. They can’t digitise food for download. Physical stores offer robust defence against disrupters entering the market.

Retailers are the experts in food distribution. They must use that expertise to deliver the service consumers are demanding.

* retail outlets or distribution centres catering exclusively for online shopping

**a temperature-controlled supply chain

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Focus on what matters to consumersIn the UK, online grocery service levels have changed dramatically. A decade ago, consumers endured poor availability, long delivery time slots and websites full of missing product information. As any retailer knows, the task of service improvement is never complete. But progress in this area has been great.

Consumers ultimately care about service. The most important element of an online grocery business is value for service provided. We hear about all kinds of gimmicks: internet fridges, delivery by drone, or delivery by Uber. But the most important element of the service is to deliver what someone ordered, at the price they ordered it, at the time they ordered it for. This fundamental tenet of retail is very easy to miss in the hype of a digital world, but you do not have the consumer’s permission to innovate and explore new technologies unless you execute the basics flawlessly.

Consider one retailer with a vast digital team, experimenting with drones, yet failing to deliver. Consider its competitor, offering a straightforward website, built on technology which supports its service. The latter will win every time.

Will the rest of the world catch up?Global development of online grocery sales will ultimately come down to two things: how well retailers listen to the needs of their consumers, and how well they learn lessons from other countries and categories.

Every country and every region is different. In most places, there will be an approach which can unlock the growth potential of a market. In France, the explosion of “le drive”* demonstrates this; its share online has rocketed to 6.9% in recent years.

Retailers embarking on the online journey should seek out partners that can help them grow and develop. They need a sustainable business model that is positive for shareholders, distinctive to brand values, and compelling for consumers.

This was once seen as an unachievable nirvana. But the UK market demonstrates that retailers willing to look hardest will reap the rewards.

* from just one online store in 2000, to 2600 within 15 years, online shopping has experienced explosive growth in France

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hoW can salmon help?Salmon has unparalleled experience of the grocery ecommerce sector, operating in some of the most advanced markets globally. After delivering the world’s largest grocery replatform with the £1bn Sainsbury’s site, Salmon has built an international portfolio of leading grocery clients.

Salmon’s experience across a range of business models and technical solutions can help guide your business to deliver a successful and profitable online business. Our expertise covers a broad range of business areas including:

■ Business model, operational and proposition development

■ UX and visual design■ Vendor selection and solution design■ Technical build and development■ Operational support and managed services■ Business exploitation and development

Whatever stage your online grocery business is at, whether you are just starting up, or looking to optimise a mature business, let’s discuss how we can help it grow and develop its ecommerce capability.

T: 01923 320000 e: info@salmon.com

ABOUT SALMON

Salmon is a global digital commerce consultancy– the largest in WPP’s network of companies. We define and deliver market-changing solutions and customer journeys for the world’s leading brands.

Established in 1989, with operations in London, New York, Melbourne and Beijing, Salmon clients include Argos, Audi UK, DFS, Halfords, Lloyds Pharmacy, Premier Farnell, Sainsbury’s and Selfridges.

For more information,email: info@salmon.comor visit: www.salmon.com

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