Home shopping boom a threat to market leaders

After a few years of phony warfare, the grocery home shopping battle is beginning in earnest. Asda has fired its first few shots last month, with the launch of its dedicated home delivery depot in Croydon, South London.

Last week, Iceland revealed that its home delivery service already accounts for an astonishing 11 per cent of turnover. This, almost certainly, has had a far greater effect on the company’s recent profit hike than the GM food debate, which broke too late to affect its annual results.

Also last week, Somerfield signalled its determination to make a go of home shopping by buying Flanagan’s, a specialist home delivery operator based in South London.

This initiative is the most important of all: a necessary consequence of Somerfield’s brave decision to launch a fully fledged, national home shopping service covering all its lines by early next year through the digital interactive TV service Open, which launches this autumn. As one close observer comments: “It’s not just running at it, it’s sprinting.”

The key point about this list of real initiatives, as opposed to marginal experiments, is the noticeable absence of big hitters like Tesco and Sainsbury’s. That is precisely the point. Everybody else, their second tier rivals, consumers, and brand manufacturing suppliers has a vested interest in following a different path to them. For the first time in decades the big stores risk being left out on a limb.

For second tier rivals, the incentive is obvious. For them, home shopping means incremental business, whereas for Tesco and Sainsbury’s it’s almost certain to mean cannibalisation. The point about Asda’s new dedicated distribution depot is that it is in an area where its superstore penetration is minimal.

For consumers that convert, home shopping redefines convenience. No longer is convenience about what happens once Mohammed goes to the mountain. It’s about the mountain coming to Mohammed.

And this, in turn, has enormous implications for brand manufacturers. Packaged goods brands lost their power to retailers when retailers’ ability to influence shoppers in store began to overshadow the manufacturers’ ability to influence consumers in their homes through mass advertising. According to the point-of-purchase trade body, Popai, 80 per cent of purchase decisions are now made in store. But should the purchasing process migrate to the home, we could see a historic reversal of this trend.

However, the implications of home shopping go a lot deeper. A rise in grocery home shopping, even to a relatively small market share of, say, five or ten per cent, would severely dent a superstore’s underlying profitability if it resulted in an equal migration of business from that superstore.

Indeed, the logic of remote shopping unravels a business model whose stranglehold on the industry has been tightening remorselessly for decades.

So far, the superstore has acted like a black hole of demand. As a result of its ability to offer lower prices (due to superior economies of scale) and better convenience (such as car parks and better range) it sucked in more customers.

The more customers it sucked in, the faster its sucking power grew. Retailers could call the shots in negotiations with manufacturers, and use their stores as three dimensional advertisements for own-label versions of brands or to launch new brand extensions, for example. And the greater the store’s range and value, the more it became a destination shop, the more it’s sucking power, in ever increasing returns.

But home shopping throws all that into reverse. As soon as business flows away from the superstore rather than into it, its scale advantages begin to diminish, its sucking power begins to decline, its influence over shoppers purchasing decisions begins to fade. In other words, market power begins to slip through its fingers.

Which is why the market leaders are ambivalent. Forget brave words about being “the first to cannibalise our own business because otherwise someone else will”. The last thing Tesco and Sainsbury’s want is a grocery home shopping boom because it puts a strategy that has placed them in pole position into the shredder.

Over the past few decades, they have invested over 10bn in their superstores. And as James Millar, founder of the small south London home delivery grocery outfit Food Ferry remarks, the message of a national home shopping service such as Somerfield amounts to this: “Look! Here are our wonderful stores! We have invested 10bn in them. Please don’t come to them.”

The point for marketers is this: while remote shopping for groceries may seem like just another way of shopping it is in fact an entirely different business to traditional grocery retailing. It requires different infrastructure. The Tesco and Sainsbury’s approach of having some poor soul stroll around a store instead of a customer picking items off shelves (items which have just been placed on those shelves by another employee) is inefficient and an absolute non-starter. The only viable option is specialist, dedicated units, as Somerfield has recognised.

Likewise, as Millar points out, everything in grocery retail revolves around property and the visual; whereas remote shopping pivots on time (order times, lead times, delivery times) and the interface (such as the phone and Website). Utterly different skills, in other words.

Looking forward, these differences will become increasingly important for manufacturers. How do category management, product trials and new product introductions, packaging, impulse purchases, sales promotions and so forth, work in a non-physical, remote ordering environment?

What, for example, is the point of shelf-shouting packaging if the shelf isn’t there any more? If people are buying more, less frequently, as they tend to do when remote ordering, what does that mean for pack sizes? How does Brand A dislodge Brand B once it’s embedded in a personal shopping list and hardly ever thought about again?

Volume wise, home shopping may not be big news for some time. But the skill in marketing is not to feel the weight of history but to sense the turning points and to ride them. We are now at a turning point in the UK packaged goods industry.

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