Article

Book excerpt: "The Grocers: The Rise and Rise of the Supermarket Chains"

Read an excerpt from Chapter 9 of this new book, "The Internet and Other New Ways of Shopping."

May 4, 2011

It is a brave person who would venture firm forecasts of how the applications and uses of technology will develop over the coming decades. We have lived through the dotcom boom and bust and, indeed, through some bold predictions. Gary Hamel, one of the leading business strategy gurus of the time, was one of those predicting a "convulsive development" in retailing in the 1990s. He argued that easy cost comparisons – "frictionless capitalism," as Bill Gates calls it – made possible by the internet would drive down retail prices. "Money comes from knowing people won't comparison shop," said Hamel. "People make enormous amounts of money out of friction" (Financial Times, 11 September 1998). He foresaw the existing supermarkets ending as dark hulks around our cities, and he predicted that the firms that took over would not be those currently dominating the market, as had happened before. He was wrong on all counts – at least so far.

We now live in an internet age, when the majority of households have access to the web, and online shopping is familiar and well established in most advanced countries; in the UK, 63 per cent of households had broadband access in 2009.

Why should new ways of shopping be needed?

We know that new technology – or rather the entrepreneurs involved in and surrounding it – looks for problems to solve. In the end, it is the market that decides, when consumers are convinced that the new product offers them real benefits, in a form they like and at a price they are ready to pay. What forces suggest that there is a need for new ways of food shopping?

We know that some social groups already have serious problems with food shopping, especially those in some deprived areas, the old, those without cars, and those living in the wrong place: it is a problem of access. Most of us, from experience and anecdote, would agree that there are other problems: time, traffic, parking, queuing, wobbly wheels on shopping trolleys, screaming children (other people's or our own) and so on. The retailers are tackling many of these, but there are residual issues around the fact that much supermarket shopping is repetitive and unrewarding. As people's lives become more crowded, alternatives that will save time or effort may be attractive.

What do we mean by 'new ways of shopping'?

Discussion of home shopping often focuses on the internet to the exclusion of other modes. In fact, there are many ways in which the traditional shopping model – customers go to shops to buy what they want – could be adapted. Some of these are long-standing, such as mail order and catalogue retailing. Internet shopping is, in some ways, just a technologically advanced method of mail order.

The basic variables of the shopping process are six:

• product and service range;
• pricing;
• fulfilment;
• service provider;
• interface between customer and service provider;
• point of order.

From these flow almost 40 possible solutions.

Some of these are simple and are available now. A shopping list, produced from loyalty card data, can be produced by swiping the card when the shopper enters the store; store staff could pick the routine, packaged items while the customer spends time on the more enjoyable tasks of choosing fresh produce and wine, or has a snack, or indeed goes somewhere else (if there is anywhere else to go within reach). Other experiments use telephone, fax or internet ordering, while some offer home delivery.

In fact, we should separate the two main aspects – order capture and physical delivery – as they are quite distinct and can be tackled separately.

What do consumers want?

"The issue is not remote shopping but how to service customers," said one retail executive. We cannot generalize about customers as if they were all the same. We know that they are very different, with different needs, preferences and resources.

We know that there is a segment that welcomes internet shopping. Originally, they were mostly young, "time-poor, cash-rich," computer-literate, with fast access to the web at work or at home, and willing to pay for a service that gave them value. The ability to order from their desk appealed to them, as it saved time and avoided the unpleasant aspects of shopping (crowds, queues, traffic). They are confident in their ability to choose the right products, and not particularly interested in browsing (around supermarket shelves, that is). Internet shopping has now spread well beyond this group to embrace more and more of the general population, although it is still age related. The peak age group seems to be 35–44, as younger people use the internet most, but not for shopping. Usage among older groups is increasing (the 'silver surfer' phenomenon), but the poorest sectors of the population are still least likely to be internet shoppers. Interestingly, between 2006 and 2008, the proportion of the population saying they did not want internet access at home rose, from 3 per cent to 24 per cent (Office of National Statistics).

It seems certain that many people currently do not want to shop for food online but there will be alternatives. It may be that mobile access through smartphones will become a significant way of shopping. Pervasive computing, digital TV, voice recognition and other technologies will make the whole process much more user-friendly. This may draw in a new segment of people who basically do not like shopping: providing the technology is available to them, in an accessible form, they may be interested.

What we cannot know is how big these "non-shopping shopper" segments will be. We may speculate about what exactly retailers can offer them out of the total shopping experience and what they cannot. We know that offering shopping lists, reminders, linked purchases and tailored promotions is straightforward. Although the first trial by a new remote shopper may take quite a long time (perhaps even longer than a real shopping trip), after that the process should take no more than five or 10 minutes. How to simulate browsing, however, is more of a problem. Most shoppers go into the store without a shopping list, so impulse purchases make up a significant proportion of the final basket. The products we buy through browsing – fresh produce, unusual or luxury items, chocolates, prepared meals, wines – are not only the more enjoyable purchases for us, but they are likely to be among the higher-margin products for the retailer. So-called virtual reality cannot reproduce the shopping experience for such goods at present, although sophisticated data analysis can prompt purchases that fit in with customers' other choices. Estimates of the size of the segments that will take up remote food shopping vary widely, from 5 per cent to 20 or even 40 per cent. Even at 5 per cent, of course, that is still a large amount of purchasing power, so every retailer will want to make sure that it is not losing sales to a rival. In 2010, almost 60 per cent of consumers use the internet for shopping, but online purchases account for only 7 per cent of total UK sales – most people shop infrequently and spend little. For the grocery market, 13 per cent shopped online in 2009, according to the Institute for Grocery Distribution (IGD) but, of those, 30 per cent shopped less than once a month, so the online segment amounts to only 2.5 per cent of the total. The IGD expects the market to double by 2014.

Beyond true remote shopping, the rest of the population will still have needs that existing systems do not meet. Some may respond to self-scanning, others to a personalized printed shopping list, others to a screen on the shopping trolley, some to the ability to collect an order previously phoned in, others to home delivery of goods personally selected in the store, and so on. Experience of other new technologies suggests that many of us do not know in advance exactly what we do want; when the reality is presented to us, we see how we like it. Most electronic cash experiments, for example (using smart cards that can be loaded with cash value and used for a variety of small purchases), have failed – but no one could have predicted that without trying it.

What are retailers offering?

Remote ordering and home delivery are, of course, well established: mail order has been around for decades, and newer forms of direct marketing such as TV shopping channels are also successful. Internet commerce, though the majority is now business-to-business, has also made inroads into consumer markets such as computer hardware and software, CDs and books. When we look specifically at grocery shopping, the field is much less developed.

We should perhaps separate out home delivery as such, since in its basic form it has always existed and still does in some parts of the market. In the United States, many smaller chains offer home delivery as part of their service, and it can be a useful competitive weapon (though the costs must help to keep margins very low). Generally, home delivery of groceries disappeared in the UK along with counter service, and is only now reappearing in combination with new ways of ordering.

First, we can distinguish between what the grocers themselves are doing and what new rivals offer.

The lead in Britain was taken by Tesco: in May 1984 Jane Snowball became the first online home shopper for groceries when she ordered from her local Tesco via a ground-breaking initiative from the local council that allowed residents to order shopping using their television remote control. This was a one-off, but Tesco started online shopping on a small scale in 1994, had developed a more robust service by 1996, and began offering a full online-ordering home-delivery service in 2000. The approach the company took was what we would characterize as typically Tesco: carefully planned, pragmatic, starting from a low base, expanding only when it was satisfied that the thing worked, and then driving growth aggressively.