The rapid increase of consumers shopping online will cause a “long-term headache” for bricks-and-mortar retailers as the channel eats into sales within stores, according to UK internet grocer Ocado.
Tim Steiner, Ocado’s CEO, told attendees at the World Retail Congress in Paris the grocery industry is experiencing “a major channel shift” to online.
Ocado is competing with the UK’s supermarket chains online but Steiner suggested a challenge for its larger rivals is the pressure on profits from offering online services and having physical stores.
“Grocery is a low-margin industry and the traditional model has trained the customer to do half of the work, to leave the house, to walk the aisles, to pick the products themselves. We need to do all of that work for the customers. So the existing assets that exist in terms of stores are no use. You can’t pick items in a store and deliver them to a customer for a token delivery fee,” he insisted.
Steiner added: “As the customers migrate from stores they are creating cannibalisation in those shops, which is going to cause bricks and mortar to have a long-term headache.”
Steiner told attendees that a “vicious cycle of decline in stores” will result – a situation apparent in the UK with the closure of some the country’s largest music retailers.
“As the store sales migrate online, store sales densities fall, fixed costs increase as a percentage of sales, profitability decreases and the store retailer has less money to invest in shops, has less profitability and will hold less inventory in those stores and the sales environment worsens, increasing the benefits of shopping online.”
Ocado this year signed a technology and distribution deal with Morrisons, which will see the UK’s fourth-largest grocer offer home delivery from January. Steiner said Ocado despite the high fixed costs, particularly for delivery, associated with being an online player, he is confident the retailer has a model that works.
“As we accelerate our growth, our largest cost – delivery – is cannibalised solely by the density of our customers. We will cannibalise our fixed costs and continue to improve the profitability of our business, allowing us to reinvest in our customer proposition, taking our pricing below that of the bricks and mortar supermarkets.
“Whilst our pricing is below and our margin already larger, plus the personalisation of service that we offer to our customers, we think we have an unbeatable proposition.”