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Analysis: Retailers look to click & collect online profits

A customer pushes a shopping trolley as he leaves the Carrefour hypermarket in Brive-La-Gaillarde, central France, July 8, 2013. REUTERS/Reg
A customer pushes a shopping trolley as he leaves the Carrefour hypermarket in Brive-La-Gaillarde, central France, July 8, 2013. REUTERS/Reg

By Emma Thomasson and Dominique Vidalon

BERLIN/PARIS (Reuters) - European retailers have gone back to bricks and mortar in the hope of turning their online food businesses profitable - racing to build pick-up points to capitalize on shoppers' increasing demand for "click and collect" grocery options.

E-commerce has revolutionized trade in books, music, clothes and electronics in the last decade, but food has proved a tough segment to crack. Grocery represents almost 40 percent of retail sales, but providing a profitable internet option for a high-volume, low-margin business with products that must be chilled is more complex and pricey than for non-perishables.

Even Amazon has only made tentative steps into grocery, although it is now preparing to expand its "Fresh" business to 20 urban areas in 2014. If trials in Los Angeles and San Francisco work it says it may expand outside the United States, though has not specified where.

That's an alarming prospect for other grocery retailers already struggling with falling store sales as austerity drives, rising prices and wage stagnation hit shoppers.

So they are looking more closely at shopping habits and preparing to build in flexibility to boost their brands and profits. Busy customers often now prefer to collect an order, avoiding a delivery fee, than wait at home. A GMI survey commissioned by Mintel showed 39 percent of online shoppers in Britain and 33 percent in France collected goods in-store in the last 12 months. Mintel data shows young, affluent consumers - retailers' favorites - are most keen on click and collect.

Retailers are experimenting with different pick-up models, from "drive-thrus" adjoining existing stores that are popular in France, to refrigerated lockers at petrol stations and new warehouses dedicated to online known as "dark" stores. Click and collect also means they can spend less on home delivery, often prohibitively expensive outside densely-populated urban areas.

Food and consumer goods research group IGD predicts "drive-thru" will propel French online grocery sales to 10.6 billion euros ($13.98 billion) by 2016 from 6.7 billion in 2013, while it sees home delivery push UK online grocery to 11.4 billion euros in 2016 from 7.4 billion in 2013.

Stephen Mader, analyst at Kantar Retail, said retailers are moving "aggressively" to grab as much online share as possible.

"They are throwing caution to the wind in terms of profitability," Mader said, adding that once they had built scale: "They will need to pay more attention to how much money it generates."

Retailers are investing most in the easy-win of drive-thrus bolted on to existing stores, from which staff pick online orders, rather than warehouses with automated order selection, which are costly but set to be more efficient in the long run.

Europe's top retailers Tesco and Carrefour are building hundreds of collection points at stores, as well as a handful of online-only warehouses, but as neither breaks out numbers for online grocery profitability it is hard to see whether the method is working yet. Tesco, Europe's biggest online grocer, where e-commerce accounted for almost 5 percent of sales in 2012-13, says the business is profitable but experts believe that is because it does not account for the cost of having staff pick up online orders at stores.

"Picking from store is the easiest but it is disruptive to inventory forecasting. It is a short-term solution. I see a dedicated supply chain (for drive-thrus). Although it is capital intensive, it is a much more scalable solution," said Mader.

BRICKS AND CLICKS

So far France has moved fastest to capitalize on the trend. It now has 20 percent of the population already using drive-thru collection for groceries ordered online.

Leclerc, the market leader with 352 so-called "Drive"s, saw first-half sales in that segment jump 68 percent to 720 million euros, compared with overall French sales growth of 4.7 percent to 15.9 billion. The retailer estimates a Drive poaches a quarter of its sales from its own stores - but the rest comes from rivals' stores.

Carrefour is hurrying to catch up, building 283 Drives since 2010 and contributing to a boom that research firm Editions Dauvers says resulted in 920 new pick-up points being built in France over the last year, bringing the total to 2,278 by June.

The potential for growth is huge. In Britain, which has Europe's highest rate of grocery e-commerce, only 19 percent of people ordered food online in 2012. In Germany and France that figure was 9 percent and 7 percent respectively.

In Germany, "click and collect" is popular for electrical goods from Metro AG's Media-Saturn chain, but the country's dominant discounters, Lidl and Aldi, already operating on razor-thin margins, have not embraced e-commerce for grocery.

While e-commerce is marginal in southern Europe, where hard-pressed shoppers prefer local stores and markets, Carrefour has opened five Drives in Spain and one in Italy. The concept could also do well in the tech-friendly Nordics and the Netherlands.

Tesco has led the way with click and collect in Britain. Two-thirds of its non-food online orders are collected at 1,500 collection points. While most food is still home delivered, it plans some 300 grocery pick-up points by mid-2014. But it acknowledges online is taking longer than expected to make money. Though it did not break out costs, it said it wanted "a profitable, scalable model" before accelerating growth.

Wal-Mart's Asda, the UK's No 2, will offer grocery pick-up in 200 outlets by the year end, including from stores and lockers at its petrol stations. It is also trialing vans serving commuter car parks for delivery of online orders.

Collection trends can give supermarkets an advantage on pure online retailers because of their store network, warehouses and logistics, especially if they combine sales of grocery with higher-margin general merchandise and own-label goods. And a customer coming to collect will sometimes browse in-store.

"A dollar spent online doesn't necessarily mean a dollar less for the high street," said Kandar's Mader. "Smart retailers can take advantage of e-commerce to extend their brand and grow their overall share of the pie."

($1 = 0.7582 euros)

(Additional reporting by James Davey in London, Sarah Morris in Madrid, Isla Binnie in Milan, Victoria Bryan in Frankfurt, Robert-Jan Bartunek in Brussels; Editing by Sophie Walker)

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