What can Australian supermarkets gain from the UK online experience?
The stakes are high to get this next stage of online growth right.
Australian retailers are rapidly increasing their online penetration and looking at how best to fulfil the growing demand. Coles recently announced an exclusive partnership with Ocado, who have generally been acknowledged as the world’s best in online fulfilment.
As part of a recent research trip to the UK and Europe, I spent time meeting with local online grocery experts to understand the implications of this deal for Coles, supermarkets and other Australian retailers.
Who is Ocado, and why is it a big deal?
UK-based Ocado is the world’s largest dedicated online grocery retailer – they have no physical stores. Their proprietary fulfilment solution is available to commercial partners like Coles, and includes the software, hardware, services and support.
What do you pick?
I was interested to find out what makes Ocado’s system special, and the experts tell me that it is how they ‘pick”.
Picking, i.e. getting the items off the shelves in the store or warehouse, is said to make up 40% of total fulfilment costs.
There are three main camps on picking, and some UK brands use a combination:
- In-store picking leverages existing capital. Coles have predominantly been doing this till now.
- Dark stores look very similar to standard stores, with staff but no customers. Coles is currently trialling a dark store in Melbourne.
- Automated centralised distribution centres or “CDCs”. Coles has committed to build two Ocado-system CDCs in Melbourne and Sydney.
The experts I met with concur that picking costs for in-store and dark stores are way behind the best-in-class offerings from Ocado due to average pick rates for items per hour:
Average pick rates per hour
Source: Martin Currie Australia, interviews with online grocery experts.
How do you want that delivered?
‘Last mile’ delivery is one of the largest costs, so an important factor of success.
Physical stores are advantaged due to their proximity to customer homes. Dark stores and CDCs are generally slower as they are based in cheaper industrial areas.
However, in terms of drop rates per hour, my sources tell me that Tesco (in-store) and Ocado (CDCs) are both around 4/hr due to Ocado’s intelligent routing. The question will be whether Coles can achieve this too.
In comparison, food aggregators such as Deliveroo/Uber average even less at 2/hr and are loss making but make up this cost with a high revenue share from partner businesses.
Interestingly, in March 2019 Coles quietly started an UberEats trial in Sydney, delivering essentials such as milk, bread, fresh fruit and vegetables.
What does it cost to implement?
The capex on the new CDCs will set Coles back A$150m over the next four years1, but they are looking to double online deliveries with this initiative.
They plan to service metro areas via CDCs, with non-metro orders fulfilled by the store network. This is like the deal that Morrisons has with Ocado.
In less than four years, Ocado’s system has propelled Morrisons to a larger online market share than Waitrose, despite starting much later. Morrisons have however recently loosened ties with Ocado, allowing Ocado to work with other competitors such as Tesco, Sainsbury’s, Asda, Aldi and Lidl.
What’s the alternative for other supermarkets?
Ocado have spent 18 years getting their customised offer right, but there are alternatives out there for Australian companies, such as Woolworths and Metcash given Coles’ exclusive deal with Ocado.
Alphabot, a collaboration between Alert Innovation and Walmart is said to be the one to watch, as it’s designed to automate an existing store footprint. Amazon’s model works well outside grocery, but has no proven grocery offering (but watch this space). Others include Instacart, Autostore and Picnic.
What’s at stake?
Ocado is a leader with a 20% share of the UK online market2. Online is 6% of the total grocery spend and is predicted to grow to 9% by 20213.
While UK online growth is starting to mature, Australia has space to grow from its low base. Online currently only makes up around 3% of the total Australian grocery spend4.
Coles has a 45% share of the online grocery market5, but Woolworths is currently in front. Doubling online sales would add around A$1 billion to Coles’ books6.
The stakes are high to get this next stage of online growth right. Locking in Ocado may give Coles a boost for now, but Woolworths, with a team of 500+7 at the WooliesX headquarters in Surry Hills, will be taking this development seriously.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
1Source: Coles company reports
2Source: Martin Currie Australia, Ocado company reports
3Source: IGD, Statista; as at 2016
4Source: Martin Currie Australia, Woolworths and Coles company reports
5Source: Martin Currie Australia, Coles company reports
6Source: Coles company reports
7Source: Woolworths company reports
Past performance is not a guide to future returns.
The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not
be assumed that any of the security transactions discussed here were or will prove to be profitable.
Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally, and any opinions expressed are subject to change without notice. The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds. Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.