How to win in online grocery: Advice from a
pioneer
Christian
Wanner, cofounder of one of Europe’s first and largest online
grocery stores, talks about what works, what doesn’t, and what will
change in food retailing as e-commerce continues to heat up.
In
most global markets, online
grocery is just beginning to show promise. The expanding online
offerings of retailers such as Tesco and Ahold in Europe, as well as
FreshDirect and AmazonFresh in the United States, are making news.
Services such as “click and collect” or “buy online, pick up in
store” appear to be gaining traction with consumers.1
To some, it may seem like early days for online grocery, but
Christian Wanner has been at it since 1997—back when a web page
could take 20 seconds or more to load, the typical household had no
Internet connection, and most consumers were not yet comfortable with
the idea of buying things online. That year, Wanner cofounded
LeShop.ch, Switzerland’s first online grocery store. LeShop is now
part of the Swiss retail cooperative Migros and has been profitable
since 2011.
Wanner
served as LeShop’s CEO from 2000 until 2013. He remains on LeShop’s
board and is a senior adviser to McKinsey. In January, McKinsey’s
Enrique GarcÃa López, along with Rémi Said and Khiloni Westphely,
spoke with Wanner about his views on multichannel retail, the best
operational models for online grocery, mistakes chief marketing
officers make, and the power of mobile devices.
McKinsey:
LeShop
is a success story, but it’s one of only a few so far in online
grocery. Why should grocers get into e-commerce at all?
Christian
Wanner: Food
retailers can’t afford not to take e-commerce seriously in the long
run. The cynics will say, “Even after 15 years of e-commerce in
food retailing, we’re talking about at best 3 to 5 percent market
share, compared with 50 percent in travel or 35 percent in
electronics in mature markets.” To this, I would have two replies:
first, it’s true that shopping habits in grocery change at a slower
pace than in other categories—but, given much lower margins in
grocery, if you lose 5 percent of customers to a competitor’s
online proposition, that makes a big difference in both your profit
and loss (P&L) and your competitor’s P&L. What’s more,
online grocery typically attracts the most profitable customers:
dual-income households, customers who prioritize convenience over
price or promotions, big-spending customers—these are the type of
customers you’ll be making more loyal to the franchise.
Second,
digital literacy is evolving at an exponential pace. It took LeShop
eight years to reach its first €50 million in sales on PCs but just
three years to reach €50 million in sales on mobile phones.
Retailers shouldn’t underestimate the “digital natives”
generation. They need to begin transforming their organizations now;
otherwise, they will have a rude awakening when outsiders like Amazon
start entering their market.
McKinsey:
Many
grocers worry that online sales will only cannibalize store sales.
What are your thoughts on that?
Christian
Wanner: Two
comments: first, if you don’t cannibalize your own business,
someone else will do it for you. If you do not serve new consumer
needs, your competitor will. Second, we conducted several studies on
cannibalization, which repeatedly proved that a multichannel offer
increases your overall share of wallet.
For example, by isolating
5,000 households new to LeShop during one year and tracing their
behavior with the Migros stores in the previous year, we observed a
total sales increase of 30 percent among those households. Store
sales to those customers declined by around 10 percent, but that
decline was more than offset by the growth in the online business—and
in a flat market, the cannibalization was clearly at the expense of
our competitors.
Another
study, involving a very big sample group, demonstrated clearly that
our customers who shop both online and in stores spend twice as much
as customers who shop only in stores, indicating that our online
offering attracts higher-value customers. And customers who use three
channels—traditional stores, home delivery, and Drive2 —spend
2.3 times as much.
McKinsey:Retailers
today are experimenting with a variety of operational models for
these new channels—fulfilling online orders from existing
warehouses, from new dedicated warehouses, and even from stores. Will
all these models continue, or will there be a convergence?
Christian
Wanner: Convergence
has already taken place on the transactional side: in website and
mobile navigation, how you present the offer, and recipe and
recommendation features. Website ergonomics and transactional
behavior are similar across geographies and cultures, so you can
leverage similar systems in different countries.
But
I don’t yet see a strong convergence in logistics—there are just
too many geographical and sociological differences, as well as
business-model beliefs. In Latin America, for instance, the more
affluent people are highly concentrated in certain areas of the city.
In Buenos Aires, if you address those few neighborhoods, you’ve
basically covered the relevant market for online grocery because 80
percent of the population is simply not at a socioeconomic level that
will support your business. In such regions, you can go with a
dedicated warehouse close to the geography you want to serve. This
model will not be valid in Switzerland, for instance, where there is
more of a mix of social classes geographically.
Then,
you have differences in population density. Take the Netherlands
versus France. The low population density in France probably explains
the roaring success of the click-and-collect model versus home
delivery, whereas in the Netherlands—where the population is very
concentrated—the home-delivery model is viable almost nationwide.
Ahold’s click-and-collect service is making serious inroads as
well, because it brings extra convenience to the customer versus home
delivery. Logistics choices also depend on a company’s existing
assets, heritage, and capital-expenditure capacity. There is no
single best practice you can roll out worldwide.
That
said, already we see some models fading, such as store picking—that
is, fulfilling online orders from stores. I don’t think that in
2014 your logistics strategy can sustainably be based on store
picking, unless it’s a defensive strategy in a marginal business
and you are picking in a very big hypermarket. Store picking is not
industrially efficient if you account for true costs, and it does not
fulfill the promise to the customer, because it results in many
orders that have substitutes or missing products.
McKinsey:
But
couldn’t a retailer start with store picking and then gradually
move to a more capital expenditure–intensive model such as
warehouses or “dark stores”?
Christian
Wanner: First,
we will need to agree on the definition of a dark store. Tesco was
the first to coin that term, I think, and at that time it meant a
warehouse with exactly the same layout as a traditional store but
without customers. This is certainly not a model I would advocate,
because it fails to adapt the layout and workflow to create picking
efficiency. Tesco has quickly recognized this, and each successive
version of its warehouse integrates more automation and workflow
efficiency.
To
your question of whether store picking would be a sound starting
strategy, with the intention of learning the business and then moving
to something more sophisticated: it may have been a viable option for
a retailer back in 2000, but not today, because your organization
will be learning the wrong things. In store picking, the energy of
the online team, the IT people, and the general manager will be spent
on avoiding out of stocks, which means their energy will be spent on
things like substitute management and product-supply planning.
You
cannot imagine how much energy goes into substitute management:
proposing intelligent substitutes, then having a whole logistics
process for the customer to receive the substitute. You have to pick
the substitute separately from the rest of the items so that you can
ask the customer whether she agrees with the substitutes, and if the
customer says, “I agree with this one but not with that one,”
then you need a process whereby the rejected substitute comes back to
the store, and you need a process to manage the price difference
between what she originally ordered and the substitute, and so on and
so forth. Little of this is useful when you scale the operation and
move to a dedicated warehouse, which can fulfill 98 or 99 percent of
orders with the exact products that the customer wanted. So I think
it is wiser to set up a dedicated infrastructure and organization up
front and then fine-tune it until it is ready to be scaled up.
But
a dedicated infrastructure isn’t necessarily an enormous and fully
automated warehouse. You still have to make important choices as to
geographical reach, assortment depth, mode of delivery, and so on. It
would be a mistake to start with a highly automated and
capital-intensive warehouse before having gained experience in all
the above aspects first.
McKinsey:
Companies
are understandably hesitant to make big bets on online grocery
because profitability is far from assured.
Christian
Wanner: It’s
a “chicken or egg” debate. If you don’t commit yourself
seriously to this business, you will simply never achieve any
significant breakthrough. Online grocery is certainly a very
difficult business to make profitable, but it has proved possible.
LeShop’s home-delivery business has been profitable since 2011, and
this is in Switzerland, where we pay warehouse workers between €3,800
and €4,000 a month, including bonuses. But achieving profitability
takes hard work. It requires chasing every second, chasing every
source of inefficiency, chasing every mistake you make to avoid
paying the cost of correcting those mistakes.
I’ve
found that many traditional retailers are stuck in paradigms or make
choices that impede profitability in their online business. Take, for
example, the “long tail” obsession: I come across traditional
retailers who can only envisage their online store having exactly the
same assortment as their hypermarket format, thus 30,000 SKUs. This
is an ideological positioning, not a pragmatic positioning to start
with. You typically have the chief marketing officer saying, “There
is no way we should enter online with a smaller assortment than our
biggest hypermarket, because that’s what the customer expects.”
The problem is, your logistics complexity and costs increase
exponentially with assortment depth, and the customer will hardly pay
that premium. In my experience, if you have 13,000 SKUs, the last
1,300 of them will account for less than 1 percent of sales. So, you
can only imagine what it means for 30,000 SKUs. It would require
probably eight times the capital investment, because thousands of
slow-moving SKUs will need automated instead of manual picking. It’s
not impossible to manage a warehouse with 30,000 SKUs or more—Ocado
is doing that successfully—but you need to be aware that it has
direct and heavy consequences on your capital expenditures and
organization.
Another
area where you need to make hard choices is your online promotional
strategy. Should you have exactly the same promotional schemes as you
have in your stores, or can you leverage the advantages e-commerce
offers? For example, in e-commerce, you can tailor promotions based
on customer behavior, which you can’t really do in the traditional
supermarket, except through loyalty cards. You might be losing a lot
of margin points if the chief marketing officer insists on exactly
the same product range and the same promotional scheme online and
offline.
McKinsey:
Are
you saying the online business should be completely separate from the
traditional retail business?
Christian
Wanner: After
16 years in this industry, I still find it vibrant and fascinating
because there is no absolute golden rule. The right structure depends
on how the parent company is organized. A centralized company would
require a different structure than a decentralized cooperative.
What
is clear, however, is that retailers should not regionalize
e-commerce; it has to be at least national, if not transnational,
meaning that you use the same website and the same technological
platform in every country. It doesn’t make sense to have several
teams developing multiple websites and mobile platforms.
But
should the web and mobile platform be developed by the corporate IT
team or by a separate team? My opinion is that it has to be a
separate, dedicated team. The main issue is the speed of releases: if
you are just 1 percent of the business, you will hardly be a
priority. You might be a priority for corporate IT when the project
starts, but after version one has been delivered and you need
changes, you will probably wait a long time for those changes. And in
e-commerce, you’d better have a release of either bug fixes or
improvements every four weeks.
I
also think logistics should be driven by a dedicated team, not the
central logistics team. E-commerce logistics is about picking and
transporting single products, which is not a core competency of
traditional retailers. Again, this competency has to be developed by
the e-commerce team, with no legacy systems restraining it.
What
about category management? My opinion is you need dedicated people
looking at what’s happening in e-commerce and being very reactive
to customers: tailoring the assortment, the promotional scheme, and
so on.
McKinsey:
What
changes do you foresee in online grocery in the next few years?
Christian
Wanner: Consumer
behavior is evolving fast. Customers now expect to be able to
interact digitally with any merchant, so a robust digital presence
has become a must. When we launched our first iPhone app, in 2010, we
did not foresee that three years later, one-third of our orders would
be coming from an iPhone or iPad. Frequency was around 20 days
between two orders on the website; it accelerated to 10 days between
orders on the mobile phone. Our supermarket is technically in the
handbag or pocket of our customers all the time. Our app even allows
them to shop when they are offline. The screen is small, but repeat
customers are able to drop 60 items into their basket in less than 10
minutes—that’s efficient shopping! So is technology evolving?
Yes, but, more important, consumer behavior and expectations are
evolving. And we’re not talking about tech freaks here—we’re
talking about 50 percent of our customers shifting to mobile. This is
an unstoppable megatrend.
In
the coming years, retailers will need to work on what we call
multichannel or cross-channel or omnichannel—that is, harmonizing
the channel experience for the customer. It is about combining the
digital power of e-commerce with the infrastructure and service of
bricks and mortar, and determining what role each will play. We will
have to leverage the richness of online information in the
convenience channel because that is where the battle will be won. We
will need to move the battle away from “I have the cheapest stuff”
to “I have the best service.” At the end of the day, the winners
will be those retailers that best understand the patterns of behavior
of their customers and respond to those patterns intelligently.
byEnrique
GarcÃa López, Rémi Said, and Khiloni Westphely
http://www.mckinsey.com/insights/consumer_and_retail/How_to_win_in_online_grocery_Advice_from_a_pioneer?cid=DigitalEdge-eml-alt-mip-mck-oth-1412