UK online grocers must cut picking and delivery costs
A consultancy has predicted that home delivery logistics will reach crisis point for UK grocers in the next few years.
Alvarez & Marsal maintains no UK grocer has a proven and profitable home delivery model and that these models will reach crisis point as volumes continue to grow, if the retailers don’t significantly change their methods.
The UK grocery home shopping market is predicted to grow to more than £14 billion by 2018 from £6.5bn in 2013.
The company says: “Early adopters of online ordering and home delivery have found that, unlike traditional store growth, growing volumes do not always present economies of scale.
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“Some early adopters claim to be profitably operating home delivery across the UK, although serious doubts exist as to whether this claim is based on fair cost allocation.”
The white paper Home Delivery Fulfilment in UK Grocery continues: “In a simple economic model of the largest players in the market (Tesco, Asda, Sainsbury’s, Morrison’s, Waitrose and Ocado) it’s possible to predict which will survive the growth predictions using current models.
“The economic model output does not read well for any of the above, with half of them not making any margin much beyond 2016 if they operate as they do today.”
Alvarez & Marsal adds that it is no surprise that many large grocers are pushing consumers towards click & collect as it offers some of the benefits of online shopping with smaller margin erosion to the retailer.
However, three in five online grocery shoppers cite ease or convenience as their main reason for using the online channel, so there’s a risk of lost customers for those grocers who push this format alone.
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The consultancy estimates for a delivered order, more than 55% of the current cost lies in picking (under current methods) due to in-store or dark store methodology.
“This would suggest a more dynamic picking operation is called for whether the order is delivered or collected.”
The balance (45%) of the cost lies in the physical delivery to the address / pickup point.
“To maintain the lowest delivery costs it would seem reasonable to keep mileage of the final delivery vehicle as low as possible and to maximise the number of drops in a given geographic area.”
The consultancy suggests:
• Move product to the geographic region using existing primary transport as if going to the existing stores (indeed it should be the same vehicle).
• Keep stem mileages down by running the delivery van out of localised facilities, multiple delivery trips within a day may be possible depending on density of demand.
• Establish a high frequency picking operation away from the traditional store (but in the same geography) and combine with a click & collect offer similar to a trade counter (Argos / ScrewFix).
• Use modern pick methodologies and appropriate technology to maximise pick rates.
• Customers may either collect their order from the front desk or get it delivered by small van from the back of the facility — they may purchase additional products from the front desk if required using either a web terminal / iPad or similar device.
