Sainsbury's, Tesco, & UK Dark Grocery Stores

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Jason, could you share a short introduction to your background, please?

Up until very recently, I was working at Sainsbury’s, having spent about 30 years there. I started as retailer, went into store and property development and then probably the most significant part of my career was 20 years in ecommerce. I joined the founding team in the late 90s and stayed with them through the opening up of a whole bunch of stores and changing our entire delivery proposition, so we could give customers one-hour deliveries. We built a dark store and then just prior to me moving away from ecommerce, I was running Chop Chop, our on-demand grocery business which, in 2016, was a bit of a novelty. Today it is a phenomenon that is gaining much traction in the press.

Can we take a step back to the late 90s when you were part of Sainsbury’s founding ecommerce team. What was the strategic thinking about approaching online?

Back then, the strategic thinking was very much about customer acquisition. It was pre the first dotcom boom/bust period and people realized that online was going to be big but everyone also had wild forecasts as to how big it was going to be. There was a bit of a threat about, actually, we just need to get on and do this pretty quickly and acquire customers.

In the first few years, it was all about marketing spend, investing in acquiring customers and working out how to retain them. No one wanted to lose loyal customers who were coming into your store on a week-to-week basis, to your competitor, who could offer the same service for less money or had better slot availability.

Once that mechanism of acquiring and retaining customers had got itself established, it changed. It then became about how you incentivized customers to spend with you. It was more emphasis on how you could make your webstore so much better. How do you change your delivery slot pricing so that you can keep hold of customers? It became tactical rather than strategic.

How did the thinking around the fulfilment model change?

Very early on, we had some consultants do some work on our network strategy and they had forecast that Sainsbury’s would have needed nine dark stores or fulfilment centers that ran up the spine of the country. We opened one and it didn’t take off as we expected, understandably so. This was pre-broadband; it took you 10 minutes, with a dial-up connection, to get a web page working.

We rapidly moved from a centralized fulfilment strategy to realizing it was probably going to be quicker and easier for us to utilize our store estates to create much smaller ecommerce fulfilment operations out of the back of stores.

How do you compare that original thinking to today, where there obviously is broadband and a lot of people online?

I think we’ve come absolutely full circle very quickly. That is all to the power of technology. Sainsbury’s developed a really good store operating model and scaled that and got to capacity. Meanwhile, Tesco, who had – and still have today – the dominant market share, quickly moved from a store-based model to a dark store model and built several sites around London. Sainsbury’s were a little bit late to the party but the demand wasn’t there. They shut their first dark store, because it was underutilized. The development program of their second dark store started in 2013 and it was opened in 2016.

For the full circle part, from the power of technology, we have been able to utilize far better technologies in stores now which have been able, in some cases, to double the amount of capacity that a store can deliver to customers, with great picking efficiency. In the UK, there is world class picking efficiency. I am looking at it in Singapore and over in the US, right now, and they are not even anywhere close to what Tesco, Sainsbury’s and Asda are doing. With that level of efficiency, there hasn’t been the need to maintain dedicated fulfilment centers.

I saw a particular Sainsbury’s, only last week, that delivered its last order out of its dark store, as it has moved all of its volume back into stores. I think that is the right future model for fulfilment because the other thing that technology is doing is shortening lead times for customers. Customers don’t need to make such advanced planning decisions about what they are going to eat in their household this week; they can do a lot more, little and often. This plays back into the on-demand hands. I think the future of fulfilment is going to be more very much hyper local, rather than a centralized model that has got a long lead time from order placement to shipment.

The centralized method, like Ocado, arguably has better selection, better availability and better customer service, potentially. Are you valuing the convenience aspect so much that you think fulfilment should be hyper local?

Yes, I think so. If you think differently about online, it doesn’t necessarily have to be a complete replication of a supermarket. It is becoming a channel of its own nature. You can start to curate a range which is more finely tuned to what your customers really want. You don’t have to carry 30,000 SKUs because you are trying to cater for so many different preferences and choices and you’re trying to encourage customers to buy more. A broader range creates impulse. Online, that impulse disappears. On your checkout page, you might get a pop up to say you may have forgotten a few things, but the customer journey is less impulsive.Therefore, 30,000 SKUs is not necessarily that important anymore.

Ocado, as a standalone model, works really well when you want to put a brand down in a market where there isn’t already a physical presence, or you are a retailer that is last to market. I think they do an incredible job for Marks & Spencer and Morrisons, because they are the latecomers to the ecomm party and have needed to scale operations and I think Ocado is a brilliant solution to help those retailers get up and running.

Why do you think the big players in the market – Sainsbury’s or Tesco – don’t use Ocado?

Because we have a store estate. Sainsbury’s have got 600 supermarkets, up and down the country; 200 of those are running ecomm out of them, so you’ve still got headroom for another 400 supermarkets to grow their own ecomm business.

I think one of the other things that will be interesting to watch in the future will be any kind of future legislation around 3.5 ton vans driving around the country. They start out full and then they are driving back to base empty. The carbon footprint of an online grocer, in a centralized model, probably isn’t as green as utilizing your existing store estate to ship orders direct to customers. The last mile genuinely is a last mile; it’s not a last 20 miles.