JUNE 29, 2020
We put through an online grocery order with Woolworths at lunchtime on Saturday. The bags were on our doorstep before 7am the next morning. Sunday morning, that is.
There were 23 items costing $150 and the two frozen things were still frozen. It was an incredible service, but it can’t possibly have been profitable for Woolies. It would have taken half an hour to pack, in the middle of the night, and even at the minimum wage that’s at least $20 including penalties, and then – what – $10 to deliver?
That’s a cost of 20 per cent of the order. Grocery gross margins are around 5 per cent.
Woolworths and Coles both assure me that their online businesses are profitable, but I don’t believe it for a minute. I’d like to see their internal cost allocations.
To make online groceries sustainably profitable, the orders will have to be packed by robots, not humans, and both companies are now working hard on making that happen, and each is doing it in a very different way.
It will be a fascinating and important contest, for two other reasons as well: online groceries are completely at odds with the normal business models of Coles and Woolworths, which are all about scale. Supermarket success has always been about getting vast numbers of SKUs (stock keeping units) to stores as efficiently and cheaply as possible. Success with online groceries is about packing and delivering an individual order, without mistakes, profitably – including on Saturday night and Sunday morning.
The trend to online, which has been accelerated by the COVID-19 pandemic, will entrench the duopoly of Coles and Woolworths because Aldi isn’t interested (yet) and therefore well behind, and Metcash/IGA can’t do it. the family-owned IGAs simply don’t have the scale to ever profitably do home delivery, and Metcash is a wholesaler, not a retailer.
It means the pandemic will result in a profound shift in both the retail and logistics industries in Australia.
Online penetration is accelerating and stealing the marginal shopper, which means shopping malls will need to rethink what they’re doing and try to attract people in other ways, and warehousing, fulfilment and last-mile distribution is now a major growth industry, replacing the “self-serve logistics” of wheeling a trolley round the store, paying at the checkout, loading the car, driving home, and unloading the car.
The shift to online was already happening, of course, although Australia was lagging the rest of the world for some reason (for which I haven’t seen a convincing explanation) and groceries were lagging most of all because they are the most difficult, least profitable form of online retail, and understandably, it’s been a service provided reluctantly.
But grocery-packing robots are now available, so Coles and Woolworths are pushing to automate fulfilment quickly, because they can see it will lead to increased dominance.
Their different strategies are as follows: in essence, Coles is going for big automated distribution centres that dispatch groceries around the country while Woolworths will have hundreds of “micro-fulfilment centres” (MFCs) attached to its existing stores.
Coles is getting its technology from the fast-growing UK online retailer, Ocado, which is also in the business of supplying robots to other retailers; Woolworths is testing the gear of Takeoff Technology, a US start-up that is specialising in building robotic MFCs for supermarket chains.
The business models are also different: Ocado will own and operate Coles’ distribution centres – one in Sydney and one in Melbourne – and Coles will pay it a fee to pack the groceries and load the bags on Coles’ trucks; Woolworths is buying the equipment from Takeoff and will do the fit-out and own the space, so it will capture all the margin, with the US firm paid only to do maintenance and software updates in the robots.
Coles won’t be fully operational for three years, but Woolworths has already got three sites operating with one on the way, and says it can be in the game earlier than Coles.
But full scale will be a close race. Woolworths is still doing “proof of concept” on the Takeoff robots and it will take years to roll it out across the country. Space has to be found in each store to install the packing machines and they’re not even sure yet whether the system works profitably at small scale.
There’s no doubt that the Ocado system works. Last week researcher Kantar reported that online grocery shopping in the UK increased by 91 per cent from mid-May to mid-June, and that Ocado now has 1.7 per cent of the grocery market.
The company just raised a billion pounds in debt and equity and the share price has doubled in the past three months: it’s now capitalised at $27 billion – more than Coles.
UBS retail analysts reckon online grocery sales will go from 5 to 8 per cent of total sales in Australia by 2023, and take 30 per cent of growth over that period, but that seems conservative to me.
Online penetration of general retail (ex-food) is already 11 per cent in Australia and in the US and UK it’s 21 per cent and 28 per cent respectively, and still growing fast. There seems no reason to think Australia won’t catch up to the rest of the world, and that groceries won’t catch up to clothing and homewares as it becomes automated and profitable.
And since Coles and Woolworths can use it to entrench their duopoly they’ll be keen as mustard.
Even if Aldi or someone else jumps in, Coles and Woolworths will have crushing scale and speed over the last mile of delivery, especially Woolworths with its fulfilment in the local stores instead of central distribution centres.
COVID-19 is bringing many things to Australia, some good, mainly bad, and a retail revolution is going to be one of them.
* Alan Kohler is Editor in Chief of Eureka Report