■ 1.6 D. Supermarkets Fight for Online Shoppers
Tesco led with its reward card, but Sainsburys internet shopping could be a jump ahead. David Rudnick reports.
Electronic commerce is going to change the way people work, and e-file will take a close look at this fast growing, and often confusing, area. This section will look at how successfully grow an e in front of it, without tears.
BATTLE is being joined for supremacy in Britain's online home shopping market with the two giant supermarket rivals Tesco and Sainsbury pursuing diametrically opposed strategies.
Tesco Direct is stealing a march on Sainsbury by picking online orders from shelves in existing shops rather than building megasized depots dedicated to e-mail customers.
Tesco's Russell Craig says: "We chose a store-based picking system because internet shopping for food demands a great leap of faith from customers. If they see the local store operating the system alongside normal shopping it doesn't seem quite so alien to them.
"People are more likely to buy perishables if they come from a store (where goods are turned over faster) than a warehouse."
Tesco believes that using its existing shops as "mini-depots" could bring 90pc of the UK population within 25 minutes delivery time for internet orders. On average, it claims, Tesco outlets are only six or seven miles from online customers, offering prompter delivery than big depots serving large catchment areas.
Certainly Tesco is avoiding the huge capital costs of building a network of such depots countrywide. This strategy is a heavy burden for Sainsbury whose repeated exceptional charges last year have already exasperated shareholders and depressed profit forecasts.
Tesco's approach also has serious shortcomings. Paul Smiddy, a food retail analyst at Credit Lyonnais Laing, is surprised that it is persisting with its shop-based strategy when Sainsbury's approach "is so much more plausible". Employing hoards of supermarket staff to lift online orders from shelves and wheel them on trolleys to packing areas is highly labour intensive and liable to annoy ordinary shoppers, particularly at busy times like the weekend.
For Tesco, Mr Craig counters that "store-based pickers do not take enormous numbers of products off shelves and each picker services six or seven online orders at a time, using only one trolley".
But analyst Sachin Shah of Price Waterhouse Coopers remains sceptical. "Labour costs cannot be controlled in store-based picking; staff do compete for space with shoppers, getting in their way and losing time when they have to pause to answer customers' queries."
Studies suggest it costs retailers around £5 per order to pick from a dedicated warehouse, but £8 to £12 at an in-store operation like Tesco's.
Mr Shah goes much further. "These estimates understate the true costs of store-based picking, which could be as high as £70 to £80. To select efficiently and realise economies of scale, a retailer needs to automate and cut staff costs as much as possible."
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For this reason he too thinks the long-term future lies with Sainsbury's dedicated warehouses, even if Tesco "currently offers a wider product range over a larger area".
In late spring Sainsbury's home-shopping service, Orderline, will open Europe's largest grocery home delivery picking centre at Park Royal, West London. A pilot project, it will service online shoppers over the metropolitan area bounded by the M25.
A few years ago Tesco left Sainsbury standing by adopting reward cards before its conservative rival belatedly realised its error in shunning them. Now the boot could be on the other foot.
If analysts are right, and Sainsbury's online shopping strategy does ultimately prove more cost-effective, it could leap-frog Tesco once it has a national network of dedicated online delivery depots.
The potential cost is intimidating. "Sainsbury's £30m earmarked for investment in e-commerce is not unreasonable on a profit base of £600m to £700m", Mr Smiddy points out, "but it is a very big outlay at one go compared with its rivals."
Sainsbury's shareholders would say amen to that. Tesco, according to City estimates, has invested £10m to £15m so far in the internet, but its shareholders might also gag at moves to up the ante.
"We have half the country covered so far," said Mr Craig, "and the decision whether to go completely national will be taken next month." Already Tesco has announced the number of shops offering Tesco Direct is due to rise from 100 to almost 300, out of a total 647 countrywide. That should cover 90pc of the UK population.
Neither Tesco nor Sainsbury can expect substantial quick returns from investment in online shopping. It constitutes barely 1pc of total shopping and even Mr Smiddy, who believes it a trend retailers cannot afford to ignore, sees it reaching only 2.5pc by 2004.
Mr Shah believes growth will be limited by delivery glitches. "The last mile is the problem; in the US, Webvan undertakes to deliver in a 30-minute time frame but UK supermarkets are not geared to deliver with such precision or at customers' convenience, during evenings and weekends.
"Neither here nor in the US do customers have chilled food receptacles on their doorsteps but another American company, Streamline.corn, is pioneering unattended delivery in high-density areas of major cities; they will pay to install a fridge (and a lock) in your garage and let themselves in to deliver in your absence.
"But until online shoppingin the UK has really taken off companies will consider higher service levels unjustified on present low volumes."
Online shopping has other drawbacks. In-store shoppers are more likely to browse and make impulse purchases. Streetwise shoppers may also prefer to put in a personal appearance to avoid missing special promotions or discounts (and free wine and cheese tasting) not advertised online. And while the old and disabled have most to gain from the convenience of home shopping, they are least likely to be online or have cash to spare to pay home delivery charges or internet phone charges.
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Asda, buoyed by the financial strength of Wal-Mart, undercut both Tesco and Sainsbury in this area. The Big Two charge £5 for each home delivery; Asda only £3-50. Though it does not take orders under £50, Asda claims the average online spend is £80 and it waives delivery charges completely on orders of £150 or more.
But with far fewer retail outlets than Tesco and Sainsbury, Asda's challenge remains long-term. Given its paucity of retail outlets, Asda could not emulate Tesco's store-based strategy even if it wanted to. Like Sainsbury, they will have to develop a chain of dedicated online shopping depots. Two at Watford and Croydon are operational and another two are planned by the end of the year. Asda envisages spendingup to £75m on 12 to 15 more depots countrywide by 2005.
Vocabulary
leap - a big jump; a sudden large increase in the number or amount of something; a mental process that is needed to understand something difficult or see the connection between two very different ideas: a leap of imagination; a leap in the dark something you do, or a risk that you take, without knowing what will happen as a result; leap (v): look before you leap; leap year
exasperate - to make someone very annoyed by continuing to do something that upsets them; exasperation (n)
plausible a statement that is reasonable and is likely to be true, someone who is plausible is good at talking in a way that sounds reasonable and truthful, although in fact they may be lying, plausibility (n)
understate to describe something in a way that makes it look less important than it is; understatement (n); ant. Overstate
intimidate to frighten someone by behaving in a threatening way, especially in order to make them do what you want; intimidation (n)
earmark (usually passive) to decide that someone or something will be used for a particular purpose in the future
up/ raise the ante to increase your demands or try to get more things from a situation, even though it involves more risks; ante up (v) to pay an amount of money, especially in a game of chance
glitch a small fault in the work of something
browse to look through the pages of a book, look at the goods in a shop without any particular purpose; to search computer material
promotion a move to a more important job; an activity intended to help sell a product; the activity of persuading people to support an idea; the activity of helping something develop or succeed; (ant) demotion; promote (v); promotional films/events are organizes to advertise something
gain to obtain, achieve, get gradually: gain experience/ support/ reputation; gain from get an advantage: stand to gain; there is nothing to be gained; gain weight/ speed/ / height; gain access to; gain ground; nothing ventured, nothing gained is used to say that you cannot achieve anything unless you take the risk; gain (n) - an increase in the amount; an advantage; financial profit when this seems to be the only thing you are interested in; ill-gotten gains money or advantages obtained dishonestly; gainful employment/ work/ activity is the one for which you are paid; gainsay (v) (negative)to say that something is not true, or to disagree with someone: to gainsay the claim
paucity less than is needed: paucity of information
emulate to try to be like some one else, because you admire them, emulation (n)
envisage to imagine that something will happen in the future
