On Friday I did an interview with BBC 5 live about Morrisons’ decision to start offering an online grocery service in January 2014. Whilst I don’t normally talk about retail in my blog I think this does have some ramifications for the high street.
Morrisons is very late with this offer. Waitrose for example has been offering home delivery of its groceries since 2002.
The grocery retail sector in the UK is worth £163 billion. Even though only 5.5% of grocery retail sales are online as one of the Big 4 retailers, Morrisons may have been losing up to £1 billion a year in sales by not offering an online service to its customers.
This was especially apparent over Christmas when they lost out to other retailers that offer customers on-line ordering flexibility and the convenience of home delivery.
But let’s not confuse sales with profitability. It is estimated that it costs £15 to service the average online shopping basket. When you think that customers actually only pay around about £5 for the service then you can see that online delivery eats into retailers’ profitability.
But Morrisons’ market share is falling and basically, they need to restore confidence in their offer to their shareholders and investors.
Their choice of entry into the online grocery market with logistics partner Ocado is expensive but allows Morrisons to compete in their peer group, in other words by offering nationwide coverage by January next year.
If you order your food online from Morrisons, it will be delivered by Ocado, albeit in a Morrisons branded van. Basically Ocado are offering Morrisons the same service they have provided Waitrose for over 10 years. And Waitrose are not very happy about the Morrison deal.
So, is it worth Ocado upsetting such a long-term and important partner like Waitrose?
Well, Waitrose’s market share is growing but at 5% it’s less than half of Morrison’s.
Also Waitrose positions itself as a more upmarket retailer so it’s always going to have a smaller market share than a ‘big middle’ retailer like Morrisons.
Ocado’s business model relies on a percentage of sales income from its retail partners so potentially it can make a lot more money with Morrisons.
Also, Waitrose has been investing in its own delivery service, initially in London, when its exclusive arrangement with Ocado ended within the M25 area.
Waitrose sees itself as an omni-channel retailer in which case it is going to want to control all aspects of its channels to market, to ensure a standard level of customer service and control all ‘touch points’ with its brand.
Whilst it is still tied to Ocado to deliver its groceries outside of the M25 area until 2017, Waitrose has been pushing its click and collect service which means customers can order online and collect from 152 stores and also some John Lewis outlets. Sales through click and collect nearly doubled last year. This service is expected to be rolled out to all John Lewis stores and Waitrose convenience stores this year.
So what does this mean for the high street? Well as the last big grocery retailer enters the online delivery market I think we will start to see some impact on prices.
Serving the customer from a traditional store is cheaper at the moment. Customers make their own way to the store, they pick their own items, they pack them and deliver them back home themselves. The customer bares all the labour and transport costs.
High street stores may offer cheaper prices to consumers, thereby differentiating themselves by channel rather than brand. The discount retailers like Aldi and Lidl are certainly doing very well and many trade from in town or edge of town locations.
It seems only fair to reward customers with cheaper prices if they are prepared to offer their own home delivery service.