In part two of this month’s briefing on online food retail, Glynn Davis outlines the key operating models used by the main operators. Industry watchers believe retailers are moving away from using pickers in stores to allowing consumers to order online and collect either at their outlets or at specific warehouses.

1. Store-based picking

Employing dedicated pickers in-store for handling online orders has been the model of choice for most retailers. It is the most cost-efficient way to service customers when volumes are relatively low. Using pickers also has the advantage of helping retailers predict what goods their online customers will order as there is a direct correlation with the products sold in-store. 

However, Daniel Lucht, senior consultant at Research Farm, suggests there is a “slow shift” away from this model because retailers do not regard it as the best infrastructure for the future with online sales continuing to grow. As volumes increase, it becomes more viable to switch to dedicated warehouses for handling online orders. “Store picking is also complicated by out-of-stocks and the pickers getting in the way of customers,” he says.

2. Click-and-collect from stores

A fast-growing model that is being employed by an increasing number of retailers. As well as being cost efficient, the use of their own store estates provides retailers with the opportunity to encourage impulse buying when shoppers collect their orders. 

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For those operators without a conveniently located estate of stores, the availability of relatively cheap property at present provides them with an opportunity to acquire sites for launching click-and-collect style services and to act as drop-off points for goods. Lucht suggests logistics providers and the various rail and transport companies have a “golden opportunity at the moment to exploit” the growth in click-and-collect.

There are a growing number of examples of retailers using this model. They include two Belgium-based retailers Colruyt, which offers its Collect & Go service, and Delhaize, with its Delhaize Direct service. Both these propositions are complimentary to their home delivery propositions. 

German group Rewe has also recently launched its first online foray with a three-store click and collect operation around Frankfurt. At the stores, purchases are packed into a Rewe Drive Box that customers rent for EUR5 and purchases are collected at a dedicated drive-through area of the store. And even Tesco is getting in on the act, with a single store trial before it considers a roll out.

3. Click-and-Collect from warehouse

Although providing no up-selling opportunities, unlike click-and-collect from stores, this is a potentially very profitable way to sell online as it effectively lets the customer do all the work. France-based Chronodrive is an example of a retailer using this model.

Each of its warehouses turns over EUR20-30m from a team of only 20 skilled pickers who deal with all customers’ online orders. These shoppers turn up at the specialised distribution depots, enter a code into a terminal, and then pay by card. The goods are then loaded into the trunk of their car, with the whole process taking little more than five minutes.

4. Dedicated warehouses with home delivery

This model is all about scale and is therefore not without risk. “If you can create a network effect and fill the delivery vans then it works. But you need to reach scale. The risk is that competitors are too aggressive and they take your market – and then you can sink,” warns Lucht. 

UK-based Ocado does not have a store network and so relies entirely on its dedicated warehouses. It is also unique in being the only online food retailer in the world with a fully automated warehouse [see case studies section].

This has been developed at great expense and the company has been widely criticised for failing to deliver profits. Will Treasure, director of operations and technology at JavelinGroup, says question marks have been raised about whether such a model is sustainable over the long term. It will certainly require large investments in further distribution depots to make the model stack up and this is predicated on volumes continuing to increase for the foreseeable future. 

Similar to operating dedicated warehouses are online-only – or “dark” stores. These are only evident in the UK and they use the same pick technology as that used in-store. They can handle around 10,000 orders per week for delivery within a radius of up to 50 miles, which compares with the typical delivery distance of five to ten miles from standard stores. 

“They only work for high volumes of orders. Tesco and Asda have done this as they have run out of capacity for home delivery from certain stores. It’s a volume-driven model,” says Treasure.

For more of this just-food management briefing, click here.