Supermarkets Business Model for Internet Shopping

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Supermarkets' Business Model for Internet Shopping

The main grocery supermarkets in the U.K. are Tesco, Sainsbury, Asda, Somer-field, Waitrose, Iceland, Safeway, and Morrison. Most of the supermarket companies have invested in electronic shopping. However, the difference remains in whether to select goods direct from the shelves of local outlets (in store picking up) or whether to set up dedicated "Picking Centres (DC)" in addition to the existing stores. The two models are depicted in Figure 1.

Figure 1: Supermarket Internet Shopping Model

Tesco: In-Store Picking Up Model

The In-Store Picking Up model is adopted by Tesco supermarket. Tesco is the largest grocery retailer in the U.K. with 255 superstores, 220 supermarkets and 48 neighborhood stores. It is the first in the U.K. to provide Internet shopping services—Tesco.com—to its home shopper in 1996. Tesco's Internet Shopping is represented by Tesco Home Shopper, which is a information system that allows customers to choose and order almost any product in stock at a local Tesco store from the Internet and to have their orders delivered to their home. Customers have access to about 20,000 different stock items and can place their orders at any time, day or night. Tesco provides the software the customer will need on CD-ROM. This includes a database of products and prices, which the customer can browse off-line to make up the order. Customers can update product and price lists by downloading a small file stored on the Tesco Home Shopper Customer Support website. The orders are then sent via the Internet to the local branch for picking up and home delivery. The items are picked off the shelves by Personal Shoppers. The personal shoppers use a specially-equipped shopping cart with a display unit, which gives them the best routes through the store and a list of the items to be picked as they go down each aisle. Items are scanned as they're dropped into each customer's tray. Once the shopping cart is filled, the trays are loaded directly into the delivery vans that are ready and waiting behind each store. Any items that have been substituted are carefully placed on the top of each order so they can be reviewed and accepted or rejected when the order is delivered. Orders are delivered in a time slot chosen by the customers between 8.30 a.m. and 9.30 p.m. The delivery charge for each order is five pounds.

The purpose of adopting an in-store based model is for customers to have a consistent shopping experience with that of physically shopping at a local Tesco store, and also to increase inventory turnover and operational efficiency. The advantages of using its existing store base have been justified by the managers of Tesco.com (Seybold, 2002):

• Customers prefer to purchase online from the store in which they would normally shop in person, thus receive the same price for each item online as the price in the store nearest their home.

• Track consumers' shopping patterns, identify each customers' favourite products to avoid out of stock of needed items.

• Permit regional pricing variations to be maintained in order to react to competitors' price changes.

• Can pick any products from the whole store range (about 20,000–25,000 product lines) without restricting the number of lines available from a distribution center.

• No need to build new picking centers, thus avoiding heavy investment in infrastructure.

• Roll out the service faster than the picking up center model.

Ring & Tigert (2001) comment on Tesco's in-store model by stating that Tesco's net margins are about five times higher than that in the U. S., and the concentration of U.K. population and industry makes Tesco more economic to promote the services using national media than the U.S. chains that are mainly regional. Compared to Webvan, Reinhardt (2001) argues that Tesco.com benefits from the reputation of the parent company.

Sainsbury: Picking-Up Centre (DC) Model

Sainsbury uses a picking up center model. The strategy is to build dedicated picking centres (like the U.S. DC for Internet Grocers) with a primary aim to serve large urban areas or potential new customers. Sainsbury's has struggled with growth and profits due to fierce competition in supermarkets. In response, it has refurbished and extended stores nationwide, has developed new information systems to improve Business-to-Business transactions (Global Netexchange) and has developed an electronic shopping service—Sainsbury To You (www.sainsburytoyou.co.uk)—as Sainsbury's Internet shopping channel. Sainsbury's has opened a 120,000 sq. ft. picking centre at Park Royal, northwest London, with a stock capacity of 15,000 products and the capacity to deliver them to any home within the London Orbital Motorway (i.e., M25). This is Europe's largest and most technologically advanced grocery picking center. Sainsbury's To You covers over 50 percent of U.K. households through opening another medium to large-sized picking center in Manchester. Customers place their grocery orders via the Internet, payment is by credit card and the orders are pulled off every two hours. Orders are downloaded and automatically routed to the closest picking up center according to postcode. Sainsbury also uses computer-controlled order picking techniques to enhance the picking accuracy, in an effort to improve customer satisfaction. Products are selected off from the shelves by specially trained Orderline Shoppers. The picking center acts much like any other Sainsbury's retail stores, in that it orders its stock (15,000 product lines) from one of the group's conventional distribution warehouse. Sainsbury outsources transportation for product delivery, and the cost of each delivery is five pounds.

The picking up center model is also adopted by Wal-Mart-controlled Asda supermarket giant. A range of 6,000 items of food and non-food products are available via Asda's "<Asda@home>" site. The Internet shopping services are available in five metropolitan clusters around Lancashire, west Yorkshire, the Midlands, the SouthEast and Glasgow. Customers can place their orders via the Internet, phone or fax and groceries will be delivered the next day within a two hour time slot agreed with the customer. There is a 3.50 pounds per delivery charge, but free for orders over 99 pounds, which is more competitive than Tesco's and Sainsbury's.

The picking up centre model has been justified by Sainsbury's marketing director that offering Internet shopping through picking centres does not have to disrupt existing stores. The company can service a wider area, spread costs over that area, target potential new customers, and reduce the cost of picking the product. Other advantages include completely focusing on the home shoppers. Dedicated picking systems and staff that are uninterrupted by the store operation will greatly reduce handling errors. To achieve scale of economy due to the capacity to handle much greater number of Internet shopping orders than stores, also to drive costs down through automation and improved accuracy of processing customer orders.

The main benefits of using picking centers are emphasised by Asda's e-commerce director that the picking up centre would ensure the online channel is not conflicting with their core customers in the main stores and also ensuring good availability and product quality, as well as an efficient delivery service.

It is worthy of noting that the picking-up center adopted by Sainsbury and Asda supermarket looks the same as the U.S. distribution center used by Webvan, but they are not the same concept in terms of Internet shopping model. Webvan is a pure play web-based grocery retailer, whereas Sainsbury and Asda are "click and mortar" models, i.e., existing supermarkets with Internet shopping channels. This "click and mortar" model enables greater advantages than a pure e-grocery retailer in brand reputation, customer bases, and consumer trust.

Intercept Model and Cluster Model

An alternative picking-up model—"Intercept Model"—has not been seen in the U.K. supermarket sector, but is reported in use in Belgium and the U.S. (Ring & Tigert, 2001). This is a delivery system that does not directly deliver groceries to the customers' home, but to several "pick-up" points for consumers to collect their orders. It is reported that GIB (Belgium) delivers online ordered groceries to 18 "pick-up" points in the greater Brussels market from GIB warehouse, the trucks stay "on station" from 4 p.m. to 9 p.m. for customers to pick up on their way home. Shoplink in Boston uses a similar model like GIB to deliver orders to the parking lot of customers' business buildings at the end of the day. Tanskanen et al. (2002) argue that unattended reception of goods could reduce home delivery costs, and thus suggest a "Clusters Model" similar to the "Intercept Model." This is to build a refrigerated reception box at the customer's location, or a shared reception box clusters for unattended delivery. The clusters can even be located in an office-building car park for people to load their groceries into their car when leaving for home. The two models are depicted in Figure 2.

Figure 2: Intercept Model and Cluster Model

In summary, both picking up models can benefit from using advanced information technology to improve online picking-up-delivery effectiveness and efficiency. However, the in-store picking up model appears to be pursuing a strategy of maintaining customer retention and customer loyalty, since it targets customers in the existing market, whilst the picking up center model appears pursuing a strategy of market expansion, since it targets a group of new customers through minimising the disruption to the existing stores. In-store picking model may have a high level of cannibalisation of their brick and mortar store sales, whilst picking up centre certainly needs a high investment in infrastructure. It is suggested (Tanskanen et al., 2002) that in early phases, picking from an existing store is clearly the least expensive alternative. When the sales volume grows, picking from a dedicated center becomes less expensive. This will happen when e-grocery sales volumes reach between 2 million euro and 5 million euro per annum. The cost of picking at this volume becomes less than 17 percent of the total value of the goods. When sales exceeding 10 million euro, the cost of order assembly at a pick center is about 10 percent of the total sales value.

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