The great delivery outsourcing debate

One big choice many types of retailers face today as they think through their approach to e-commerce is whether to initially outsource the “last mile” to a third party (e.g. Instacart, Google Express, etc.) or to take responsibility for delivery themselves.

For food retailers, the key is to have a strategic plan that takes into account the unusually high level of uncertainty regarding the future nature, pace and extent of the online grocery channel shift. What is clear today is that being unprepared could have major negative consequences.

Click and collect is clearly the most desirable model from the grocer's perspective, as it eliminates the last mile costs, complexity and "in-house vs outsource" debate. However, it is by no means clear that consumers prefer click and collect to home delivery. The latter is still the dominant mode in the UK, where online accounts for around 6% of grocery sales (15% in the the two weeks before Xmas 2014) and is still growing at 15% p.a. I don't think Amazon would be expanding its US Fresh delivery service progressively across the West and East coast if it hadn't detected a certain level of demand for the service, even if they are just using groceries as a way of increasing purchase frequency and reducing delivery costs by bringing it in-house with their own fleet of vans. Furthermore, the explosion of online food delivery start-ups in the US over the last couple of years suggests considerable pent-up demand.

The only country in Europe where click and collect is the dominant model is France, which is partly due to the prevalence of the hypermarket format which is increasingly seen as too time-consuming to get round. There also appears to have been an active effort by the market leaders to keep delivery prices high in order to keep demand low. However, contrary to initial hopes, this Drive model leads to very few impulse or fresh food purchases in store. The head of Leclerc, which is the click & collect market leader in France with a 50% share of "Drive" sales, has even admitted that he hopes this channel does not grow too much more.

As with most things, the extent of demand for grocery home delivery will be largely determined by the price and quality of the service offered. In the UK, the average delivery fee has fallen from £6 five years ago to £4 in 2012 to £2 in 2014, as the major retailers, as well as pure online specialist Ocado, battle for customers in this new channel. One hour delivery slots are now the norm.

No-one can tell how big the market for groceries ordered online and delivered to the home will eventually be. Some people used to think consumers would never order fresh food online; in the UK it turns out that fresh penetration online is similar to that in-store. However, once the online space race genie is out of the bag, it won't go back in. Meanwhile the growing presence of pure online operators may make it more difficult for this game of prisoner's dilemma to have a favourable outcome for store-based retailers. Amazon and Google both have strategic reasons for driving online grocery sales, together with the financial clout to subsidise (i.e., drive down) the price of delivery further.

All this leads to the conclusion that food retailers should plan for uncertainty and stay flexible. As long as the likes of Instacart, Google Express and Shipt are willing to bear some of the service cost subsidy, they can be a useful, relatively low cost way of testing the level of demand and price elasticity for home delivery vs click and collect, while signalling to competitors that you may want to co-operate rather than be the snitch in the game of prisoner's dilemma (i.e., aggressively chase online customers). However, give the variety of different players in this game, it would also be prudent to start building in-house fulfillment capability and analysing the pros & cons of various options (pick in store vs dedicated warehouse, manual vs automated including next generation robotic picking technology) under different volume scenarios. 

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