Co-op must maintain focus on improvements at its stores

Co-op must maintain focus on improvements at its stores

To much fanfare, The Co-operative Group confirmed it will be the last of the "big five" UK retailers to throw its hat in the ring and enter the online channel. While the company is emphasising the growth potential offered by rapidly expanding online sales, Katy Askew suggests that the grocer will have to think outside the box if it is to combine an online offering with what remains its point of difference - convenience.

Operating in developed markets poses a particular challenge. Companies must look for pockets of growth in a landscape competitive to the point of saturation. And UK retail is no different.

As sales in big-box, hypermarket-style, out of town stores fall out of fashion - and even conventional supermarkets come under the cosh - the country's largest retailers have been scratching around to find areas of growth. Two opportunities have widely been recognised as meeting this need: online and convenience.

Indeed, the UK's three largest retailers - Tesco, Sainsbury's and Wal-Mart Stores' Asda - have been pushing to drive online and convenience growth for years. While these businesses do not make the greatest contribution to group sales, all three retailers confirm that they are the channels witnessing fastest growth.

Morrisons, the country's fourth largest retailer, has also focused on developing a "unique" convenience format - which leverages its integrated supply chain and focus on fresh. More recently, the firm confirmed that it will move online and revealed it has inked a deal with Ocado as it looks to develop back-end processes and expertise.

So, this week's confirmation The Co-operative Group plans to enter the high-profile online arena caused quite a stir.

The company said it is investigating "a number of digital solutions" as it looks to expand into the country's GBP6.5bn (US$8.7bn) online grocery market.

According to the firm's food retail chief Steve Murrells, the group is looking at a way to combine its strength as a convenience retailer with innovative online options.

"We recognise that the online grocery market is a rapidly growing channel, which provides a significant opportunity for us as, primarily, a convenience retailer. We have trials planned later in the year to help us identify the best convenient solution to online food retailing," Murrells revealed.

The company has not detailed its thinking on what these options could include, but the group has emphasised that whatever the outcome, the offering will be tailored to the convenience market.

This will be key if the Co-op is to grow its presence by expanding online. But it will also be extremely challenging.

The Co-op's small footprint, town centre stores appeal to consumers top-up shopping and impulse purchase needs. People don't do a full weekly shop at their local Co-op, they nip down the road to one when they run out of milk. Delivery slots just don't meet that need.

Click & collect? Well, maybe, but is anyone really going to bother booting up the computer (or even opening the cover of the tablet or other mobile device) to "save time" pre-ordering GBP6 worth of groceries - the Co-op's average basket size? 

It is hard to imagine an online concept that can be truly geared to the needs of the convenience market, and even harder to conceive of a model that will do so cost effectively when other retailers, whose average basket size is far greater, still struggle to boost the margins of their online businesses.

It is also worth noting that the other area of growth in UK retail, next to online, is convenience. While the Co-op is the country's biggest convenience retailer with a network of stores in unparalleled locations, the firm has struggled to keep pace with the other multiples, who are growing much faster in the convenience sphere.

In a bid to stimulate the top line and refresh consumer appeal, the company has spent much of the past year ramping up investments in pricing, supply chain and store improvements. Indeed, earlier this month the group revealed that it would relaunch its standard own-label line in an attempt to drive sales.

In March, management said the group's efforts had seen sales begin to move in the right direction, but conceded these initiatives that have been felt on the bottom line.

With profitability already under pressure, the Co-op will have to tread carefully to ensure that an attempt to expand online does not serve as a distraction from some of the ongoing problems at its core stores - and a costly distraction at that.