Internet sales require a new kind of distribution

London, UK:  A new model of distribution is needed as supermarkets react to the growing demand of internet shopping.

Already, retailers such as HMV and Comet struggled to compete with the internet, and now the big food supermarkets are changing strategy as customers begin to favour online shopping over visiting big stores.

In January, when Tesco delivered a profits warning, its chief executive Phil Clarke said that the days of massive new stores were over.  He told reporters: “Do you need to build large hypermarkets in the UK when the internet is taking so much growth in electricals, in clothing, in general merchandise?”

Industry insiders say that it was probably a mistake for any supermarket to open stores over 5,000-6,000m2, as it is becoming a challenge to fill them with enticing products when many things sell better online.

“Most supermarkets do not offer a particularly inspiring shopping experience or well-informed staff.  Their main selling points are convenience, reliability and price.  The internet has ratcheted up competition on all those measures, particularly in music, electrical goods, books and even clothing,” says Sarah Butler, writing in the Observer.

UK retailers realise they have too much physical space.  “The economic downturn, which has dampened retail sales growth, has only exaggerated a strategic shift towards the internet,” she says.  Consultancy Verdict Research says online sales have more than doubled to £26.3bn in the last five years and will rise to £40bn by 2015.

The pace of change has varied dramatically for retailers in different sectors.  The most dramatic shift is in music and film retail where more than half of physical products, not including downloads, are now sold online, according to Verdict.  HMV has announced the closure of 40 stores while rivals Music Zone, Virgin and Borders have all disappeared from the high street.

Electrical stores are also under pressure with just over a quarter of their goods, from washing machines to hi-fis, now sold online.  US retailer Best Buy pulled out of the UK last year closing all 11 stores while rival Comet was sold for just £2 and Dixons Retail, which owns Currys and PC World, saw underlying sales in the UK and Ireland fall by 7% for the 12 weeks to 7 January.

New services are merging the physical and virtual shopping experience such as “click and collect”, where shoppers can order online and pick up in a store of their choice and “quick response” (QR) labels which, if scanned with a smartphone, can take shoppers straight to a mobile online store to get information or make a purchase.

Supermarkets have not ignored online retailing.  Tesco and rivals Asda, Sainsbury’s and Waitrose all offer groceries and non-food online with “click and collect” services.  All the major supermarkets are also rapidly expanding into small local stores to take advantage of the trend towards more frequent small shopping trips rather than a “weekly blow-out” at a hypermarket.

Judith McKenna, chief operating officer, at Asda says: “People are shopping at large hypermarkets less frequently.  That’s partly because of the internet but also because they don’t want to spend money on driving out there.  We’ve recognised that change and that is why we are opening more small local stores that offer convenience.”

But those grocers have also been unwilling to give up on their addiction to new physical space.  Supermarkets were working on the development of 40% more new space in the first half of 2011 than they were in 2008 according to property company CBRE, all offering more room for general merchandise.

Neil Saunders, managing director of retail consultancy Conlumino, says the supermarkets, and particularly Tesco, need to switch their focus into investing in their existing portfolio rather than opening new stores.

“Although you may think people go for the lowest price, most people are questioning whether to buy things at all at the moment and they need cajoling or inspiring into spending.  If the setting is not interesting or inspirational it’s easy to leave an item on the shelf,” he says.

All supermarkets have been slow to realise that shoppers now want more from a store, but Saunders says: “Tesco was more aggressive than anyone else in opening new space and so they have found themselves with more of an issue than a lot of other retailers.”

“Tesco has clearly recognised it has a problem.  Last week it announced plans to spend £300m on improving its stores and customer service.  It will take some effort to improve the stores but there is every chance for Tesco to succeed.  For all the hype about the internet, physical stores remain important, claiming 90% of all retail sales.  Physical retailers offer more flexibility, excitement and convenience than pure-play online stores,” says Butler.

It’s much easier to pick up clothing, DIY equipment or big electrical goods from a store.  McKenna at Asda says: “People browse in store but might choose to shop online.  You have to think of a joined up offer.”

Enormous stores may need rethinking, but they are unlikely to become extinct in the near future. But growing home delivery required by internet sales, especially of temperature-sensitive food products, will challenge retailers.

Even Morrisons, which has stayed well clear of the web, is now considering internet shopping.  Morrisons boss Dalton Philips  makes the fair point that the beauty of supermarkets, from the owner’s point of view, is that the shopper handles the time-consuming and fiddly business of selecting the goods from the shelves and taking them home, writes Nils Pratley, in the Guardian.

Philips  thinks nobody in the UK is making real money in online groceries. “So either shareholders are suffering in the form of lower profits, or existing customers in the shops are paying higher prices; neither is attractive,” says Pratley.

“The honest truth about the future, though, is nobody really knows what level of return will be earned by the capital now being directed at transforming established retail giants. Is Morrison’s relative slowness out of the blocks an advantage or not? It can learn from others’ mistakes, but is that sufficient compensation? One suspects the retailing industry is about to pay a very big investment bill before the efficiencies arrive,” Pratley says.