What is margin and delivery trading

Tesco and Ocado

• What looks like another warehouse on the M25 motorway ring from the outside, houses the future of retail on the inside. At least that's what Philip Clarke, head of the supermarket chain Tesco, hopes. Great Britain's largest retailer calls the gigantic hall in Enfield, north of London, Dotcom-Store, because it is where customers' orders are processed from the Internet.

Everything is precisely timed on an area of ​​15,000 square meters. Three kilometers of conveyor belts accelerate the movement of goods, computers know the quickest route to hair shampoo, organic potatoes and ready-to-eat pizzas. The bakers arrive at two in the morning, the so-called shoppers arrive at four in the morning, sorting orders into boxes, and at six the drivers of the more than 70 vans deliver the goods - this is how supermarket works on the Internet. Clarke has made e-commerce an "absolute priority". He plans to invest 173 million euros in this business over the next few years.

With their competitor Ocado, they only know online trading. The internet supermarket is currently building a new distribution center for 260 million euros. Ocado does not have a single store, only has warehouses and a fleet of more than 800 brightly colored Mercedes delivery vans that drive the streets of London, Brighton and Manchester every day. They can deliver 21,000 different products. "Ocado forever changed the way we shop," said Sir Stuart Rose, chairman.

Ocado and Tesco - these are two supermarkets in the digital age: If the customer does not come into the store, then the store comes to the customer. From 6.30 a.m. to 11.30 p.m. at night, seven days a week. Great Britain is the pioneer in Europe. In no other country have the big chains invested so much in digital trade. Nowhere else have customers become so friends with buying with a click. And traders are just learning how hard it is to make money on the Internet with apples and pears, toast and butter.

In 2012, total food sales in the UK were around € 200 billion. But the crisis is not leaving the UK alone: ​​inflation has risen faster than incomes over the past three years. The British are spending less money, the retailers are feeling it. "Right now I don't see where growth in this sector will come from," says Richard Hyman, president of the consulting firm Patel Miller, who has been observing the industry for decades.

It is dominated by several chains (see box). Discounters who wage bitter price wars have grown in recent years. The traditional chains are reacting and are now increasingly relying on their own brands. The market leader is by far Tesco, followed by Asda, which is part of Walmart, and Sainsbury's. Tesco is now also at the top online, with a 48 percent market share.

The Amazon Effect

The eight largest supermarkets have expanded their sales area by 36 percent in the past five years. Tesco alone has 3.7 million square meters. The large amount of space is now a problem for numerous chains. A market insider estimates that around 500 properties are practically unsaleable and are not needed.

Little growth, customers who hold their money together, too much space - there is a lot of pressure on the supermarkets. The solution is believed to have been found on the Internet - and not just at Tesco. But the niche is still small: only 3.4 percent of all supermarket purchases on the island are made online - in Germany, according to a study by the management consultancy A. T. Kearney, it is 0.2 percent. The good news: it's a niche with potential. The industry institute IGD predicts that digital sales in Great Britain will increase by 98 percent over the next four years. The euphoria on the part of the supermarkets is great.

The consultant Richard Hyman tries to dampen it. "It's almost exclusively about market share. Earning money is not the priority right now," he says. Indira Thambiah, who has worked for numerous retail groups for many years and today as a consultant, speaks of the "Amazon effect".

When Amazon started selling books and CDs over the Internet, nobody took it seriously at first. In the meantime, the company has outgrown the competition. "And everyone paid dearly for it," says Thambiah. The book retail chain Borders went bankrupt, the traditional company HMV has filed for bankruptcy. An experience that the big supermarkets don't want to have. "They developed online platforms in the late 1990s so as not to lose touch if there was something to be won," says Thambiah. It is quite possible that those who only enter the market later can learn from the mistakes of the pioneers.

If you want to find out more about how the online market for supermarkets works, you have to go to Hatfield, around 20 miles north of London.

The headquarters of Ocado is located there in an industrial park. It is true that Tesco, Sainsbury's and Asda list the online division in their annual reports. However, it is difficult to draw any conclusions about profitability from this. For one thing, the numbers aren't particularly detailed. On the other hand, online and offline trading are not always easy to separate. It is difficult to draw the line between where digital sales begin for a traditional supermarket and where stationary sales end.

Not so with Ocado. The supermarket only exists on the Internet. It shows how complicated it is to interlink the digital with the real world. Ocado was founded in 2000 by three previous Goldman Sachs bankers, who floated the company on the stock exchange in July 2010. At that time the issue price per share was 180 pence, today it's only about 85 pence. Only in January did Ocado need a capital increase of 44.2 million euros. The costs eat up the income.

Around 5180 people work for the company, 70 percent of the country can be supplied with food from the brightly colored small trucks. In 98.3 percent of all orders last year, the customer received exactly what he had ordered. Almost every delivery came on time. Should something go wrong, for example when the heavy milk bottle has crushed the ripe tomatoes, they don't have to be paid for. It is not necessary to call a call center for this, complaints can be conveniently settled online. "At Ocado they have a very sophisticated system, it is fully automated, it is efficient and tailor-made - but is it also profitable?" Asks Andrew Stevens of the market research company Verdict.

In 2012, Ocado achieved revenues of 819.8 million euros, an increase of eleven percent compared to the previous year. But the distribution costs alone hit with 209.6 million euros. In the end, Stevens determined a margin of 0.4 percent from Verdict. 260 million euros for the second distribution center is a daring investment. "It is an investment that will be difficult to repay," says the market researcher.

The laws of the industry

Ocado was the pioneer. The company has set the standard for good service - and has created many problems for the industry. Because service is expensive. In addition: the grocery trade has its own laws. Sound carriers, DVDs or books can be sold relatively easily using standardized procedures. In the case of food, on the other hand, there are many small details that count. And it is the sum of the many details that makes the business so expensive.

Number one cost driver: The delivery time at Ocado is limited to a maximum of one hour. This is convenient for the customer: Nobody wants to stay at home all morning and wait for their purchases. But the fixed delivery is expensive. Computers show the drivers of the vans which destination they should head for next and the shortest route to get there. But the time window is so tight that a road often has to be approached several times because customers have chosen different delivery times. A van manages 151 deliveries per week on average.

Cost driver number two: The service is very cheap for the customer. This is how buyers are lured into the Internet. But it doesn't pay off for the seller. Clive Black is an analyst at the investment boutique Shore Capital and has calculated the business models of the online markets. "On average, a customer pays 6.50 pounds per delivery. The supermarket loses money because the delivery costs between 15 and 20 pounds."

The limits of progress

Black makes a simple calculation. In stationary retail, the supermarket has a margin of around five percent. If a customer buys apples, pears, milk, wine or bread for 100 pounds, the dealer earns five pounds. If someone orders the same on the internet, the store loses £ 3.50 as delivery actually costs £ 15 but only charges £ 6.50. "This is how stationary retail subsidizes online retail," says Black.

In addition, online trading abolishes the principle of self-service. When a customer goes to the supermarket, he looks for the mustard himself on the shelves, puts the frozen pizza himself in the insulated bag and puts the yoghurt pots in the cart himself. He carries his goods to the cash register himself, loads them into the car himself. It's exactly the other way around online: the supermarket searches, packs and delivers - and pays for it in the end.

Cost driver number four: algorithms cannot do everything. For example, if a customer has ordered a cucumber that is currently out of stock, it will be replaced by an organic cucumber. However, the price for the cucumber ordered is billed. This means an additional loop for the merchandise management system. Meat, on the other hand, is freshly cut and the weight delivered is charged - not the weight ordered. The wrong cucumber, on the other hand, is billed as ordered. "That takes a complex system," says Indira Thambiah.

In general, availability is a big problem: Anyone who orders 100 articles online and doesn't get three of them can quickly get angry. After all, he usually only finds out about this when the van is at the door. It no longer matters that the availability in the store is usually lower. But: in the store, customers help themselves, instead of English breakfast tea, they buy Earl Gray - or cocoa. An automated system cannot possibly know exactly what each customer's tastes are. But the customer is counting on everything working perfectly on the Internet.

Cost driver number five: the delivery truck. Because there are frozen and chilled products in the supermarket in addition to those at room temperature, the delivery van must also have three different temperature chambers. But that limits the loading capacity. Tesco, for example, has recently started selling garden chairs, televisions and refrigerators over the Internet. Ocado is now also following this path. Such products drive online sales.

However, the real world sets very tangible limits to the virtual world, which are measured in centimeters: A garden table does not fit in the grocery van because it is full of shelves for boxes. What seems quite simple virtually - to add a table to an inventory control system - turns out to be impossible in real business. "Much of what was once thought possible is very difficult to achieve," says Indira Thambiah.

So far, investments have been based primarily on the principle of hope. In 2012, the British bought goods worth 6.9 billion euros from their online supermarkets. The industry institute IGD assumes that this sum will have risen to 13.7 billion euros in five years. In particular, smartphones and tablet computers should boost sales, predicts Edward Gardner of the consumer research company Kantar World panel. He speaks of m-commerce. Many supermarkets have programmed shopping apps for mobile devices. And once twice as many customers click on the butter instead of touching it, the systems are better utilized and are profitable - according to the calculation.

It has not yet been proven that it will open. The consultant Richard Hyman says: "It is not necessarily certain that economies of scale will arise." More orders led to more sales. "But that also means higher personnel costs, more stops for the delivery truck, longer distances, more complex systems. More sales often lower costs less than expected."

Then why all the effort?

"It's about market shares. Many people think: we'll see later if we can earn something with it," says Hyman. "Online food is the only retail segment that is growing in this market. Anyone who does not participate is afraid of being left behind." But if you take part, you face a different risk: "You cannibalize yourself with online trading," says Hyman. "There are new costs, but not more sales. You just defend your position."

The dealers see it differently. In their annual reports, they only present their shareholders with good news from the virtual world: Sainsbury's, Tesco and Ocado have high growth rates in online sales. "However, what of it is attributable to food and what of it is to other products, is often not broken down," says Indira Thambiah. In addition, portals like Mysupermarket.co.uk put the dealers under pressure. The cheapest supplier can be selected at the push of a button.

Back to self-service

The solution? "Higher purchase sums and higher delivery costs for customers," says banker Clive Black. But the question is whether people will participate. The skeptic Richard Hyman is suddenly an optimist - and brings Amazon into play. The mail order company's prime customers would voluntarily pay for better service. "You have to make the customer feel like they're in control."

The supermarkets have come up with a second solution. It's called Click and Collect. You load your shopping cart at home using your computer and later pick it up yourself. Tesco is building collection points for customers who come by car. The competitor Sainsbury's is building pick-up counters. And the small premium chain Waitrose uses the association with the John Lewis department store - so anyone who wants to can pick up a television purchased online at their nearest supermarket. "This is the next big thing," says David Gray of consulting firm Planet Retail. "And it's many times cheaper for sellers than home delivery." Clive Black also estimates that 50 to 60 percent of the costs of the delivery trade can be saved for the shops in this way.

While the winners have already been determined, there is also a loser: Ocado. Without branches, the online pioneer has no chance of reducing costs. His potential saviors are already ready, however, who have so far held back in the digital business: the department store chain Marks & Spencer and the supermarket chain Morrisons. The rumors that either of them could take over Ocado are continuing. Then Ocado would also have collection branches - and the race could start a new round. ---