Online – What will the impact of ‘online’ be on independent c-stores?
This week I am putting forward some of my thoughts on the impact on independent c-stores from ‘online retailing’ The UK multiples continued march for domination of the food market continues unabated. Tesco are developing purpose built e-stores to handle the ever increasing volume of this sector of their business. With online sales annual growth of 13% and having recently opened the sixth dotcom only store at Erith and with nearly 200 stores now offering Click and Collect drive through collection points – they are clearly in the lead. Morrisons have their work cut out and are playing catch up in terms of not just developing their convenience store numbers but especially their online plans. They recently reported that sales were continuing to suffer because they do not yet offer online deliveries. This is all due to change following to their new romance with Occado, the online retailer who has yet to make a profit despite burning through large sums of shareholders’ funds to date when they jointly launch their online service. This is planned for January with the start of food deliveries in Warwickshire, before rolling out the service to other parts of the country and they hope to cover 50% of UK households by the end 2014 and 70% in a couple of years. It seems to me that Occado needs Morrisons as much as Morrisons need Occado. Sainsburys, Waitrose and Asda are all running fast to try to catch the horse leading the charge – Tesco, while the sleeping giant, the Co-op, only delivers shoppers’ bags that they have bought and paid for in store in a small number of locations. Not exactly high tech. What is the impact to the UK c-store market? Maybe the real question should be ‘does the online activity of the multiples draw from their own core sales or is this taking away sales from the convenience sector’? The answer I believe lies with the operators of the stores in the convenience sector. If they offer consumers a good service, fair pricing, great availability in excellent stores that are staffed by well-trained teams, then the convenience operators do not need to have undue concern. Shoppers will support good local stores – and will continue to shun the average and poor, other than for absolute distress purchasing, and deservedly so. Yes, online does chip away at the overall market but I believe that the largest damage is done to the major multiples in terms of taking away sales. Will the independents emulate the multiples home shopping offer? That’s highly unlikely on many counts. Home shopping demands near perfect stock availability of an extensive range as consumers become more demanding. Tesco claim that they have 20,000 fresh, grocery and household products available for delivery in 2 hour slots. The independents could scarcely guarantee this on 10% of that depth of range so an immediate flaw could open up in the independents’ offer as a small range would cause credibility issues and shoppers would be more inclined to stay with the operators with the broadest ranges. The infrastructure costs to the independent are also disproportionate to the potential financial returns and makes this a high risk strategy that few if any will really take the risk on. For anyone really contemplating entering this market – just read up on Occado and that will be enough to persuade you otherwise. So, my view is that the good independents need to stick to doing what they do best, operating great convenience stores and leave the multiples to do what they do. When you look into Tesco’s trading profit as declared in the interim trading results for the 26 weeks to 24th August 2013, in the UK alone, profits of £1.131Bn were made, this equates to £43.5m a week or £6.214m every day. Put the Tesco profit (not turnover) into context, this is substantially larger than the turnover of most of the leading symbols in the UK and therein lies the issue – with such massive profitability, Tesco are untouchable. They have deep pockets and are an unstoppable force who will continue to dominate the marketplace, just as they have the general retailing and online shopping markets - what will be next? The impact of online to the convenience sector – minimal to the good operators in the medium term. Shoppers will continue the drift more to supporting the good convenience operators with the independents still having the largest share of this market.