Starship-robot home delivery – a new threat for the mults?

     ‘Step aside, old guy’                                                                   pic: Starship Technologies

Former Skype co-founders have announced the launch of auto-buggies that are capable of carrying the equivalent of two grocery bags, and complete local deliveries within 5-30 minutes from a local hub or retail outlet, for £1.50 a drop, 10-15 times less than the cost of current last-mile delivery alternatives.

Thus in one stroke, they will become the latest market disruptor, meeting consumer needs to shop smaller, faster and more conveniently, with a delivery cost that undermines the traditional £20 cost that causes major retailers to lose £15 on a £5 delivery charge…

Starship Technologies is currently testing and demonstrating prototypes and plans to launch the first pilot services in cooperation with its service partners in the US, UK and other countries in 2016.

Customers can choose from a selection of short, precise delivery slots, and during delivery, shoppers can track the robot’s location in real time through a mobile app. On arrival only the app holder is able to unlock the cargo. Integrated navigation and obstacle avoidance software enables the robots to drive autonomously, but they are also overseen by human operators who can step in to ensure safety at all times, and where necessary converse with pedestrians.

Forgetting for a moment all the reasons why robot-delivery is not going to work, move into just-suppose mode and survey the post-success scene:

• Reductions in traditional home delivery charges…consumers already twitchy
• Mults/Ocado adopt robot-delivery, possibly leasing from Starship Tech?
• Or mults leave the small-delivery field and focus on ‘big deliveries’
• Just think applications in other categories/services…and don’t expect Jeff Bezos to sit this one out…

One thing is certain, the ‘fundamental re-structuring’ of the grocery market still has a mile to go…

Action for suppliers:
Starship Technologies are unlikely to attempt the additional risk of setting up of product-aggregation hubs and will probably form alliances with a wholesaler/s and/or possibly a major multiple..

If a wholesaler, expect that wholesaler to grow, and become more profitable and powerful.

In other words, time to reshuffle your customer portfolio deck, again!

Tesco £40 minimum delivery spend, an each-way bet on basket-size?

Their new £4 surcharge on orders below £40, in line with Asda and Sainsbury’s, means that Tesco are crossing fingers that a sufficient number of core £25-users will either pay the surcharge or raise their order-quantities to £40+…

In practice, they are taking the basket-size route to fulfillment-cost amortisation vs. the blanket-distribution approach of Amazon i.e. delivery density – try tracking your next Amazon parcel and be impressed by the number of local deliveries your driver makes en route to your door.

The Tesco numbers look like this:

Order size £25
Tesco gross margin say 25%, i.e.       £6.25
Delivery charge, say £4                      £4.00
Delivery surcharge - £4                       £4.00    
Approx. cost of order fulfillment say £20.00

An improvement, but Tesco still loses say £5.75 per order

Order size £40
Tesco gross margin say 25%, i.e.  £10.00
Delivery charge, say £4                 £4.00
Delivery surcharge - £4                   £0.00    
Approx. cost of order fulfillment say £20.00                                          

Tesco loses £6 per order (i.e. needs incremental sales of £24 to cover the loss)

In fact, apart from increasing the base delivery charge, Tesco’s only route to break-even is via its gross margin i.e. say 25% of goods sold. This means they would need to increase the minimum basket-size size to £64, to break even on a delivery.

If Aldi enter the home-delivery race, my bet would be on them taking the localised delivery-density route, if Amazon don’t beat them all to it….

Ocado - the real 'backstory' to a home delivery service

According to Graeme Burton of Computing, in discarding the idea of off-the-shelf software from the start, the development of bespoke software has taken Ocado into cutting-edge research into robotics, artificial systems, machine learning, simulation and more, as it bids to perfect its systems – and, potentially, to turn the fruits of this research into a platform that it can use to expand or offer as products or services in their own right.

“We are building an end-to-end platform that starts with the customer placing their order on a web shop or mobile and ends in their order arriving in a one-hour delivery slot at the kitchen table,” says Ocado’s technology director, Paul Clarke.

In other words, there’s much more to Ocado than just vans and warehouses, and it isn’t just implementing technology – it’s inventing it.

The deal they signed with Morrisons [in July 2013] was intended as the first of many. There won’t be other grocery ones in the UK because it’s exclusive, but in other territories and in non-food they say they can and will do others. In fact, work is also under way to “re-platform” Ocado’s non-warehouse technology for the cloud so that it can be rolled out to others, either elsewhere in the world or in the UK for non-supermarket applications.

In addition the vision systems that Ocado has been developing will enable its robots to be able to identify different goods, classify them and deal with them appropriately, all along the supply chain.

See more detail here

Given the above rate of innovation, it may be worthwhile for suppliers to embark on a deeper level of partnership with Ocado, not only to optimise current use of home delivery, but in order to anticipate the potential of the technology and its application both home and abroad…

In other words, an opportunity to help your colleagues in other countries share in Ocado’s leading edge applications, at all levels…

Tesco to build national network of online-only 'dark stores'

They are not open to the public but used to assist nearby shops unable to keep up with internet orders. Tesco already has four dark stores in London but internet boss Ken Towle said on Monday that another two would open in Crawley and Erith, near Dartford, and it was scouting other cities, including Birmingham and Manchester, for locations.

Future dark stores
Towle said Tesco's would need "tens" rather than "hundreds" of dark stores. Speaking last week, Tesco chief executive, Philip Clarke, said Tesco.com "provides all the growth we have in our core food businesses these days".

Where this is heading
Besides representing a threat to Ocado, Tesco with 50% of an online grocery market that will be worth 6% of total grocery spend by 2016 (IGD), the market leader is still at an early stage in its rebalancing of online-and physical store presence that will reflect online demand, with an increasing dark store weighting that will provide a means of reducing online overheads and help to subsidise the cost of home delivery.

In other words, it will always be difficult for online grocers to break out of the '£5-per-drop' mode, so lower-cost dark stores will help by releasing more of the retail margin to help cover delivery cost losses   (See posting below)

Home Delivery charges - a one-way subsidy?

Given that picking, bagging and making a home delivery costs supermarkets up to £20, the £5 charge actually represents a subsidy for the service.

This leaves the retailer with four options:

• Absorb the loss: impossible on current retail margins, especially as the online/physical shop ratio increases?
• Charge more for instore purchases: An increasing an unacceptable burden on those that want/need to shop instore.
• Charge £20 per delivery: a significant turn-off for many online shoppers?
• Or radically increase the minimum order size: a likely mismatch with real shopper need?

Going for scale
Some retailers may see significant scaling up of home deliveries as a possible solution, with the milkman’s street-agreements as a way forward (in the final days of home delivery of milk, dairies agreed solus access to individual streets in order to make individual milkmens’ routes profitable), a practice that might cause issues with the competition authorities, nowadays…

A radical business model?
However, for radical thinkers, the way forward may be via a significant scaling down of store sizes and numbers to better match a shrinking need for physical presence as online increases. With less physical overheads, the average retail margins of 25% could be used to fund home delivery, thereby evolving a new retail model that fully acknowledges a future balance of online and physical retailing.

Otherwise, Amazonian third party online retailers will emerge to take up the space, profitably… 

An Amazonian window?

Yesterday’s news that Ocado is in risk of breaching its bank covenants, coupled with its fall in share price, could represent a takeover opportunity for Amazon

Loan covenant definition:
A condition with which the borrower must comply in order to adhere to the terms in the loan agreement. If the borrower does not act in accordance with the covenants, the loan can be considered in default and the lender has the right to demand payment (usually in full).

Minimum financial ratios
The borrower is required to maintain a certain level in key financial ratios such as:
- Minimum quick and current ratios (solvency & liquidity)
- Minimum Return on Assets and Return on Equity (profitability)
- Minimum equity, minimum working capital and maximum debt to worth (leverage)

Market impatience
Given that Ocado is forecast  to make a loss of 1.5% in 2012 and 2013, it is unlikely that in the current climate, the markets will be prepared to tolerate any further delay in achieving acceptable levels of profitability.
Moreover, a leading retail analyst has warned that online grocer Ocado is in significant danger of breaching its banking covenants this year, owing to a toxic cocktail of a "pile of debt and falling market share".

Ocado’s dilemma
Essentially, Ocado has reached a point that often causes problems for an undercapitalised business needing to fund the development of critical mass.
They have broken the back of grocery home delivery in an M25 enclosure that has the potential population to provide a profitable opportunity for the right company.

The Amazon opportunity
Amazon meanwhile needs a way of adding groceries to its repertoire and showing it can match traditional providers in terms of service level, profitably…

We believe that taking over Ocado would provide such an opportunity.

As you know, Amazon entered the UK grocery market last year with a piece-meal ‘multiple-delivery’ model that failed to impress anybody other than those people who saw it as merely an opening gambit.
Moreover, in July last year it was mooted  that the acquisition of Ocado might represent a good opportunity for Amazon, at a time when Ocado’s market capitalisation was £1bn.

With Ocado’s market capitalisation now having fallen to £365m, we believe that the likelihood of a bid is a running certainty…

NB If you want to catch up with Amazon see our free paper Amazing Amazon

Tesco trials UK’s first virtual stores

                                                                                      pic: The Financial Times
Tesco on Monday launched a two-week trial of the UK’s first interactive virtual grocery store at London’s Gatwick airport, following positive results in Korea,  an innovation which generated 25 million online posts around the globe. See Tesco Vid

Holiday-makers in the North Terminal departure lounge can browse 80 core products, from milk and bread to toilet paper, displayed on 10 large refrigerator-sized touch screens. They can scan bar codes with a smartphone to place them in a Tesco.com online shopping basket, and arrange for delivery when they return from holiday.

On-site help
There are staff on hand to explain how it works, to talk shoppers through how to download the app and sign up to Tesco.com – if they aren’t already using it – and even a couple of iPads to let customers sign up there and then.

Roll-out options?
If the trial is successful, Tesco could position the interactive screens anywhere members of the public congregate, the only limitation being cost-effectiveness…

Korea reality vs. the UK?
However, a key difference between the two markets is that the online-distribution infrastructure in Korea is so well advanced that it is possible for commuters to place an online order en route and have the goods delivered on arrival home.

UK distribution limitations
In the UK it will be necessary for Tesco to so manage expectation that the new facility will be seen as an enhancement to normal online shopping, fitting in with the shopper’s routine ordering-delivery process.

Direct vs broadcast media?
In terms of funding, the bar-code units will probably replace traditional poster-advertising, whilst much of Tesco’s Press and TV media could possibly be converted to direct-response advertising by incorporating bar-codes wherever possible. It would also be possible to auction some premium product-space to appropriate brand-owners.

Threat to traditional media?
The future of Tesco’s remaining media usage, thus challenged by measurable response, has to be open to question, in these unprecedented times.
In response, major brand owners may explore the application of bar-codes to their own eposter advertising, directing consumers to trade-partner retailers, by negotiation…

Either way, we are on the brink of fully complementary shopping, adding another spoke to the wheel of omni-channel fulfillment…
A pointer for your omni-channel NAM? 

A home delivery service using local independent shops?

If you don't have time to visit the butcher, the baker and the fishmonger, someone else can do it for you

Growing fast, Hubbub was launched 12 months ago and now uses more than a dozen shops and six delivery vans (bright yellow ones – watch as they crop up everywhere soon). Currently it just serves an area of London which stretches from Kentish Town, via Islington and Hackney to the City, but the plan is to roll it out across the whole of the capital early this year and following that, the rest of the UK.

The clever bit about Hubbub is that if you log on in, say, north or west London, you will be only be served by the shops in your immediate vicinity, so you will be directly supporting your local businesses.

Scale issues remain but once they achieve critical mass, this has got to  be a winner, surely worthy of some support from suppliers and retailers..?

A final pre-austerity treat for those not tired of Christmas fare?

For those amongst our readers still awaiting delivery of their Fortnum & Masons £5,000 Christmas hampers we can reveal that the unforgivable delay has been caused by a disastrous IT failure at the store earlier in December. As you know, the £5,000 Imperial Hamper comes packed with Beluga caviar, foie gras truffles, cognac butter, a magnum of Cristal 2002 and a bottle of 32-year-old whisky. 

Full refunds are available and who knows, perhaps a bogof might shift the unsold stock?  

In which case, why not indulge in a final pre-austerity bash this weekend?