Two shopping lists for online grocery offerings - Tesco builds on COVID gains (1/2)

Stuart Lauchlan Profile picture for user slauchlan April 18, 2022
Summary:
In the first of a two part article, Tesco's online growth plans come under the spotlight.

 

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As noted on previous occasions, the COVID crisis sparked a massive societal shift towards online grocery shopping. As the Vaccine Economy takes shape, a lingering question has been what happens next? Does the online interest remain high or do shoppers head back into the stores choose their groceries in person?

In the UK, Ken Murphy, CEO of Tesco, argues that the retailer has emerged a much stronger business, nowhere more so than online:

As expected, we have seen some normalization, but we are still seeing around 1.2 million orders each week, over 60% higher than pre-pandemic. Basket sizes are up to and online grocery still represent nearly 14% of the total UK sales, about 5% more than two years ago. This is testament to the brilliant work the team did to open up our capacity when customers needed us most in the first few months of the pandemic, and their continued efforts to maintain an outstanding service to our customers over the last two years.

The result of that effort was the addition of one million new customers overall, over two-thirds of which (67%) continue to shop with the firm, either online or in store. As for that ‘normalization’ Murphy alludes to, that’s a wider industry features, he argues:

From an exceptionally strong base last year, we have further increased our online market share by over 140 basis points. We continue to lead the online market in the Republic of Ireland, with a share of 59%, and our online business in Central Europe has grown strongly.

Developments

While Murphy expects to see further normalization in the current year, Tesco continues to see online as one of its key medium-term growth opportunities. The firm now has four Urban Fulfilment Centers (UFC) and a fifth in Rutherglen opening next month. These are crucial for growth, according to Murphy:

In addition to providing extra capacity to allow our grocery home shopping business to grow UFCs also improved the economics. Our UFC pick rates are around four times the rate of manual picking.

Another key element is Click & Collect, he adds:

Having peaked at around 25% of orders during the pandemic, we are still seeing around double the proportion of Click & Collect than we had two years ago. This year, we have rolled out an additional 102 locations for customers to be able to pick up their groceries and are continuing to refine the customer experience.

And delivery is the final part of the online proposition, he concludes:

Our super fast home delivery service, Tesco Whoosh, is now in 200 stores. While we are still not certain of the scale of demand in this part of the market, our aim is to make sure that if customers do want the convenience of having their shopping delivered within a very short period of time, they can do so without leaving the Tesco ecosystem.

We plan to roll this service out to 600 stores in this financial year, with further refinements to the customer offer being trialed along the way. We have pushed on with our convenience opening program, opening 40 new Express stores and 59 new One Stops. In the coming year, our opening program will take us to a total of over 2,000 Express stores and over 1,000 One Stops.

Overall, expect more investment in technology and automation, Murphy says:

Rising costs, by definition, make automation solutions more feasible, but actually don't change fundamentally our trajectory because I think that we need them to work, and work really well for the business before we invest in them.

The good news is that things like Urban Fulfillment Centers are working well. And we're seeing now productivity levels from our latest two investments, and we've gone from two to four in the last couple of weeks and will add a fifth in the coming weeks, that are hitting productivity levels that we forecasted in the business case and the latest one is accelerating towards that business case level of productivity on a much faster arc than the first two, which really gives me great confidence that we've learned the lessons, and we've really refined the model and we're in good shape of it.

That really will help as much in terms of increasing our capacity online as it will in reducing the cost to fulfill. And of course, it also accelerates our ability to capture and process an order, which means we'll be able to fulfill a full grocery order much, much faster, particularly on a Click & Collect basis than we would have been able to do historically. And so that's really pleasing.

Greater personalization of offering is another corporate objective, both from a supplier perspective and from a customer perspective. Murphy explains:

We're really trying to work hard on making sure that whatever we put in front of customers, is really relevant and pertinent to that shopping mission or to their life stage. That requires great insight, great intelligence in terms of understanding. It means that we need to be more choiceful about what we display. But consequentially, we give suppliers a much higher rate of conversion, and a better bang for their buck. And we give customers the sense that we really get them and what we show them is really relevant and helpful in that moment in time.

He adds:

We’re getting increasingly sophisticated in terms of our personalization journey. It's part of the I Love My Tesco ClubCard driver as a component of the strategy. Converting over the last two years, our customer base from 2 million digital app users to 9 million digital app users. [That] is a really key component of that, because it means you can get them those offers in those propositions in real time.

Then when you ally that with the fact that on a two year basis, our online, grocery home shopping business is up 60%, you can see where this could go as an incredibly powerful platform. We look at our pricing investment from a market perspective, ie where do we need to be to be really competitive and offer customers great value? We don't take money directly from an income stream and put it into value per se. Those two decisions are independent. We will maintain that value proposition, that's our commitment to customers. And as we build our Tesco, Clubcard proposition and personalization engine over time, we do expect it to be an increasing contributor to profit.

Part 2 - Albertsons rolls out its plans for an omni-channel mix.

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