Sainsbury's challenge - build a lasting omni-channel retail model for the Vaccine Economy

Profile picture for user slauchlan By Stuart Lauchlan April 29, 2021 Audio mode
Summary:
Sainsbury's plunged to a heavy loss this week, but the foundations of a strong omni-channel future look to be in place.

Sainsbury's

Whatever else becomes an enduring legacy of the COVID crisis, the shift to online grocery shopping looks to be one of the more irreversible phenomena.

Around this time last year shoppers were in seemingly interminable virtual lines trying to panic buy toilet paper. Things have calmed down, but the move to digital shopping and delivery has continued.

As noted earlier this week with US chain Albertsons, the trick now for grocery firms is how to ensure that continues into the Vaccine Economy and how to pull off the necessary omni-channel balance between online and offline.

There was another reminder of this with the latest financial results from UK supermarket chain Sainsbury’s. The societal shift to online is clearly evident from a cursory scan of some key stats:

  • 42% of total sales are now digital.
  • 90% of sales in its Argos division are now online.
  • The firm now offers 850k+ weekly grocery order slots, more than twice as many as last year
  • There are now 7.4m+ users of the digital Nectar rewards scheme.
  • And those online sales keep on accelerating even as COVID rates decline. In Q1, they were up 87% year-on-year; by the end of Q4, that growth rate was 147%.

grocery
(Sainsbury's)

So, all good, yes? Well, up to a point. Sainsbury’s just turned in a full year loss of £261 million, a shortfall attributed to restructuring costs, but also to COVID-related expenses. So striking that elusive omni-channel balance is going to be crucial moving forward, as CEO Simon Roberts acknowledges when he notes:

Our technology and digital capabilities have rapidly scaled, enabling us to serve customers whenever, wherever and however they want to shop. We've spoken before about the rapid shift to digital. And there is no better illustration of the agility of our platform over the last year than the growth we've delivered across our digital businesses. Online grocery sales have more than doubled to £3.6 billion pounds.

Grocery growth

In fact, Roberts stakes a claim to Sainsbury’s being the fastest growing of the major online grocers:

The rapid acceleration we have seen has driven our market share. We've been the only top three grocer to gain share over the year, and we've seen the biggest share gain of the Big Five over the last two years. We've been there for our customers when they needed us, and we think this puts us in a good place to retain more of that new online share than our competitors. Some 58% of grocery online customers were new to online shopping with us last year, and as well as growing capacity, we've grown profitability, with a pipeline of initiatives to support this.

grpc
(Sainsbury's)

To that end, Sainsbury’s has expanded the conventional home delivery model from our existing store base, but also substantially ramped up  its click-and-collect presence, he says. Examination of the data here is revealing. Click-and-collect is now on offer out of 321 stores, covering 98% of the UK population, while online delivery by Sainsbury’s operates out of 253 and is also on offer to 98% of the population. Both channels see basket sizes of around £100.  In addition, the company has a relationship with Chop Chop out of 43 stores across 17 cities and Deliveroo and Uber Eats out of 200 stores across 37 locations. Those third party delivery tie-ups provide smaller basket sizes, between £20 and £35.

It’s all about options, says Roberts:

Click-and-collect sales are up nearly tenfold, and grew to record levels, peaking at 27% of total digital sales, as we rapidly expanded that capacity to meet demand. We continue the expansion of Chop Chop and our unique dual partnership with Deliveroo and UberEats, enabling customers to buy from over 1000 products and get delivery within 30 minutes. Now scaled to a £50 million pound business, these on-demand propositions are a great example of us responding to rapidly changing customer habits for these immediate missions and partnering to accelerate our plans.

Economics

All of this means that the online profit contribution is four times higher than it was a year ago. Basket sizes are up 13%, while the number of orders per van is up 38%. All of this is good news, argues Roberts, and certainly given that the likes of Walmart are yet to turn an e-commerce profit, it appears to bode well:

When we look at online economics over this next year, we know we will face some headwinds, but we've already started in a much stronger place on item pick rates, having recovered to pre-pandemic levels. This is continuing to step up and we know we have a lot of cost efficiency benefits to come through.

Looking beyond the short term store pick economics, we are taking a good look at the evolution of the online market. We have already gained a better understanding than most of the immediacy market. The economics of the model will change as the balance between automation and labor costs change, and as customer expectations around immediacy change too. We are confident in the continued profitable evolution of our store pick model. But given the pace of change, we are bound to be looking at these things across the industry, like other grocers.

Digital assets

The Argos arm of the Sainsbury’s empire is the real success story, says Roberts:

Argos has really come of age as a digital business. We are the third most visited retail website in the UK with online sales up 69% Over 3 million customers were new to Argos in the year...We've been there for customers when plenty of businesses haven't been able to, and they have experienced our market leading click-and-collect and home delivery propositions, with nearly 40% of sales delivered to home.

But he also points to the firm’s Nectar loyalty/rewards program as another enormous digital asset:

Nectar is powering our ability to connect with customers through hyper-personalization of offers linked to individual shopping habits. It's a profitable business, and we are accelerating performance. Not only do we have 18 million active Nectar collectors, we continue to grow our digital database, now with more than 7 million users. This is market-leading by some distance. We've made significant investment in our digital media capability, and we believe we are now industry-leading in this space. Our suppliers recognise the value of being able to effectively communicate with these engaged customers, attracted by the strong and measurable ROI we can deliver by converting customer reach relevance and engagement into sales.

Last year we bought Argos onto the Nectar platform, and we are already linking more Argos customers with Nectar than expected, giving new and better insights into these customers. They're linked to our other brands in a new more efficient way to talk to and incentivize them.

We announced our partnership with British Airways, and the launch of our two way Nectar/Avios partnership is a great demonstration of the power of Nectar. It's a meaningful currency for customers and  one they're increasingly engaged with through the Nectar app. You only need to take a look at the social media the days after the partnership was announced to realise quite how engaged customers are here.

My take

Sainsbury’s has been hit by costs that may well be one-off in nature, so it’s too early to tell how the firm will shape up to Vaccine Economy realities. But the omens look good for building on the omni-channel acceleration that has been seen over the past year. One to watch.