Counting the cost

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As retail chains write down their store assets and high streets atrophy, home delivery becomes increasingly important in the over-all “cost to serve”. Is the model sustainable or will something have to change?

Listen to the bullish statements made by many multi-channel retailers and analysts and one would conclude that, despite the best efforts of Mary Portas, the high street is in terminal decline and before long we’ll be buying just about everything online. That may seem like a futurist dream of plenty for logistics services companies, but what are the practical implications?

Reviewing the transcript of an industry round-table recently, I came across the following comment from a senior executive with one of our major supermarket chains: “The model of home delivery is not viable – it costs a lot of money,” he said. “There’s a reason for supermarkets to have a large car park. We need both online and offline. We have to provide an experience, so that it’s worth coming to a place to do shopping rather than have it delivered.”

It is the sort of comment retailers may make in private but to which few admit publicly. Back in the early days of online grocery shopping I remember one supermarket chain estimating the real cost of delivering each online order at between £12 and £20, while another swore never to go online until actual delivery costs fell to £5 (a threat the company rapidly abandoned to keep up with the competition). 


Those “supermarkets with a large car park” effectively offload the final delivery costs to the customer in much the same way that – in theory – “click and collect” removes the delivery charge.

Click and collect also encourages store footfall and provides another opportunity to sell more to customers – much as various “shop of the future” models, popular in the 1990s, suggested that supermarkets would become places of entertainment, where a customer could watch a cookery demonstration while waiting for the online order to be loaded into her car.

Home delivery is not a low-cost option for the provider – especially since many websites trumpet “free delivery” on every page. For international orders this is not always quite as generous as it seems since the item “price” includes VAT which is not chargeable on exports and neatly covers the shipping cost. Home delivery is also not always quite so attractive for carriers either, especially with major web sites pushing for lower prices; while if a signature is required parcels may join the expensive merry-go-round of depot-van-depot for several days.  Or even worse, the consignment goes back to the sender with mounting ill will all round.

Systems such as Collect-plus or ByBox have developed to overcome many of these problems, making it easy for shoppers to return goods as well as for parcels to be safely and conveniently left for collection.  Some parcels at any rate – not the weekly grocery delivery or a consignment of fresh kippers sent down from Northumberland. As that supermarket exec admitted the current model of home delivery is “not viable”: some other system has to emerge if shoppers are to benefit from keen pricing while retailers achieve acceptable margins. Elsewhere in Europe postal service providers are starting to deliver groceries, collect laundry, and drop off an assortment of online purchases. Elsewhere, too, the unattended locker market is very much more developed than here with a great many shoppers requesting delivery to their locker, which may be situated at a corner shop or supermarket car park rather than at home. 

Tesco began installing ByBox lockers at selected supermarkets a year ago while Polish postal delivery company InPost has just launched in the UK and is reputedly scouring Cornwall for suitable sites to install its automated parcel terminals. According to a report in April in the Western Morning News, InPost is currently looking for 2,000 sites in the UK by the end of this year. It has already started with a location in St Ives and the aim is to have sites no more than a mile and a half apart for maximum customer convenience.


Meanwhile, supermarkets are already grappling with the impact changing shopping habits are having on their stores. Tesco has already announced a property write down of £804 million as it pulls out of developing 100 sites because more shoppers are opting for the Internet rather than visiting a store, while its latest profits were down by 14.5 per cent. Sainsbury’s latest profits, too, were hit by a property right down and sale of sites which it no longer plans to develop, leading Panmure Gordon analyst, Philip Dorgan, to comment: “While there is some good news on reduced space growth, we don’t think that it goes far enough. We think that the food retailers need to go cold turkey on the short term fix for growth that is new space, especially with over 20 per cent of food retail likely to go online.”

When online sales were 4-5 per cent of turnover, reduced margins on such orders could, no doubt, be easily swallowed. With some retailers now reporting online sales approaching 40 per cent – and with a fifth of grocery sales heading online – it is a very different matter. Do retailers raise their over-all prices to cover the increased “cost to serve” caused by “free” home delivery? Do they encourage yet more click and collect by making their stores must-go-to destinations complete with parcel lockers? Or do they watch their share prices fall as profits warnings take their toll? 

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