Success of Net home shopping lies in the hands of regulators

I’m not the first and nor will I be the last to accuse the supermarket chains of posturing. The most obvious acts of hypocrisy have historically been related to their so-called price wars, in which supposedly cut-throat competition amounts to little more than shifting the esoteric lines.

There are also grounds to be suspicious of the margins between the supermarkets’ sourcing from suppliers and their charges to customers, an issue recently made the subject of a Competition Commission inquiry. As it happens, I think that’s a historical issue, but it won’t have stopped the grocery chains’ hand-wringing protestations of innocence.

They may be at it again, this time with regard to the home shopping market. Again, their efforts to penetrate more effectively the densely populated conurbations such as London may amount to just a tinkering with the issue. And, again, the future of such services may unduly be affected by regulators.

Sainsbury’s announced on Monday that it will invest up to 10m on the UK’s largest food selection centre to date, capable of delivering any of some 15,000 products to as many as 10,000 customers each week.

Meanwhile, Asda is capitalising on the muscle that it hopes to develop with the Kingfisher merger by sinking some 20m into four centres around the capital, capable of delivery to 2 million households. More money and greater penetration than Sainsbury’s, but fewer products – Asda offers a potential shopping list of 5,000 items.

Tesco claims about 200,000 subscribers to its Internet home delivery service, and collects and fulfils its customers’ orders from its stores.

There is currently a debate being played out as to whether it is more cost-effective to run a service from stores, as Tesco would have it, because they are closer to delivery destinations than centralised stores, or whether depots offer greater economies of scale, as analysts at Dresdner Kleinwort Benson would claim.

As yet, I don’t know the answer to that and I’m not sure anyone will until the business has matured. But Tesco is well-positioned technologically. In a worldwide survey just published by the London School of Economics and sponsored by the American software company Novell, Tesco ranked second, only behind Lufthansa, the German airline, in development of e-commerce.

That’s a huge achievement. It’s also particularly pleasing that six out of the top ten in the LSE study are European companies, and the fact the UK Government is expected to adopt a fairly relaxed attitude to Internet regulation may further bolster European developments in e-commerce.

In fairness, though, I don’t believe the UK supermarkets’ posturing over home shopping is anything like as cynical as it was during the supposed price wars of the past. Nor do I think it is as self-serving as the supermarkets’ attitude to regulation of their profit margins. This is because online penetration of the home retail market is at such a nascent stage.

It doesn’t matter whether Sainsbury’s invests 10m in home shopping or that Asda invests twice that much or, for that matter, whether Tesco gets Internet exposure to the entire Web market. If they don’t establish commercial relationships with those who have the whip hand on online domestic penetration, these strategies are worthless.

The proprietors in this market are those who own the wires and satellites – the cable and telecoms companies. The online revolution in the home is what’s driving the extraordinary consolidation in those industries. The 36bn bid by AT&T for MediaOne, with its strategic stake in Telewest, is just one symptom of that.

In comparison, the home delivery operations run by the store chains are insignificant. However, their potential is enormous and the cable operators and telecoms recognise this. Just ask yourself whether the majority of supermarket shoppers would rather order their groceries through the television in the lounge or the laptop in the back room.

Returning to the issue of e-commerce regulation, it is reported that the UK Government is bowing to pressure from the IT industry by agreeing to a minimalist approach. This, it might be argued, is good news for UK telecom operators but bad news for those concerned with copyright piracy, such as the music and movie industries.

However, this argument misses the point. The Government would like to give the impression that it has a role to play in forming e-commerce regulations, but in reality the issue will be decided by the European Commission’s Copyright Directive. We’ve been here before: Prime Minister Tony Blair was “minded” to impose a two-year moratorium on genetically modified foods, as if that issue is to be decided in London rather than Brussels.

But it is the regulatory climate that will prescribe the degree to which the distributors of online domestic access will be able to develop their markets to the advantage of the owners of the content.

UK supermarkets need strategic alliances with the telecom operators, with whom their fortunes are intertwined. And, as with their profit margins, the supermarkets’ destiny in home shopping lies, once again, with the regulators.

George Pitcher is a partner of issue management consultancy Luther Pendragon


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