Home Delivery – a postscript..

There was an article in the Sunday Times this weekend (here) which reminded me of the home delivery ‘trap’ I wrote of a couple of weeks ago.  Ocado has been going for ten years, has never turned a profit (though makes £10m of underlying ‘ebita’), and the owners of the business hope to float the business on the Stock Exchange before it actually makes a profit.

What has clearly kept the business going has been the 3 founders capacity to raise the ever increasing sums of money to keep the business going – were it not for their backgrounds as Goldmans Sachs Bankers, I doubt the business would have survived.

The economics of home delivery are rubbish – even via the dedicated Ocada network.  The only way to keep the business going is to know how to raise the cash the business continually demands.

Maybe I am just jealous – if they do get the business to float, they net a cool £130m..

Jon Nicholas

The “Home Delivery Trap”

I was watching TV this week – the Money Programme – looking at supermarket spending habits during the recession.  Interestingly, Fairtrade purchases have increased over the last 12 months, ‘Organics’ have fallen off a cliff.

During the programme, one family was asked to stop its weekly Tesco shop, and instead try in turn: shopping on the urban high street (butcher, greengrocer…), Iceland, and purchasing only ‘Value’ items.  All three turned out to be cheaper (in 2 cases, up to 25% less) – however, at the end of the trial, the shopper stated that she was going to carry on using Tesco for her weekly shop.  When asked why, she said that she liked the flexibility and convenience of shopping on line and having it delivered.

Clearly, shopping on line is here to stay, which is a mixed blessing for the retailers.  As a process, it is one of the most inefficient going – supermarkets now have legions of staff walking round their own stores, picking up items that their colleagues have put out a few hours before, bagging them, putting them in plastic boxes, and then passing them to other colleagues to drive them up to customers’ houses.  The economics are nutty.  But the supermarkets are caught in a tight spot – what they would love is for you to pick it up yourself whenever possible, and pay a hefty premium for the convenience of home delivery.  The premium being charged is too low, but is now a ‘market rate’, and scope for increasing appears limited.

How can the supermarkets create a change in customer behaviour that will address these issues?  Slots could be reserved by geographic area – larger vehicles carrying out more drops in a smaller area may help a bit.  Or maybe setting up a dedicated delivery network – Waitrose, via Ocado, have a parallel sales channel, which may have slightly better economics, but it’s not  a breakthrough.

I am not sure the current ways of working can last forever – the supermarkets will look for ways to change customer behaviours, either through rewarding store visits, or limiting home deliveries, to get more of us back into the stores.

But if the Money Programme is to be believed, if we have to go to the stores, we may go elsewhere…

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