Online groceries have grown rapidly and retailers now have two main choices for product picking ­ in store or dedicated warehousing. Jacob Bruun-Jensen and Jonty Shipley review pros and cons for UK retailers Online shopping with home or office delivery is rapidly becoming a way of life throughout Europe. More than 50 companies are offering this kind of service, with seven operating ­ or about to start ­ in the UK. Increasingly, customers are using these services because they don't have the time to shop or dislike grocery shopping. But consumers expect a high level of service from these new operations. A survey of 6,000 consumers by Roland Berger & Partners found that not receiving what was ordered was the biggest bugbear among users of online services. For the retailer, fulfilling orders is one of the largest costs in providing home delivery quite apart from being one of the hardest aspects to get right. Retailers are still searching for the best way of assembling orders, but generally, they use one of two methods: n store picking ­ orders are assembled instore by picking products off supermarket shelves using low levels of technology. Tesco Direct and Sainsbury's Orderline both currently operate in this way; n dedicated warehouses ­ orders are assembled in central, dedicated facilities, often using labour saving devices, such as hand scanners, conveyor belts or pick to light' technology. This method is widely used in the US where about 70% of home delivery retailers, mostly start ups, operate from dedicated warehouses and have a targeted range. In contrast, only about 30% of European online companies are using dedicated warehouse facilities. European online retailers tend to be existing grocery operators who have added a new channel. Most have gone online by taking the low risk, low cost option and now the concept is established they stand at a crossroads. Should they continue with store picking or build dedicated warehouses? Store picking has its advantages. It allows fast, low risk expansion of the service in the early growth stages, and delivery distances are generally shorter because stores cover a small, local catchment area. It also has some serious disadvantages: out of stocks, high picking costs, capacity constraints, store customer disruption and range inconsistency. It is also more costly at higher volumes than dedicated warehouses because stores are designed to trap customers and are not laid out for picking. The picking and distribution cost difference between store picking and dedicated warehouses is considerable being as much as 5% of revenues. US online operator Webvan claims its automated dedicated warehouse is 10% more profitable than supermarkets. Store picking also has a serious problem with out of stocks, one of the most important issues with consumers. This is because forecasting errors are statistically greater for the smaller volumes in store than larger volumes in a dedicated warehouse. As a result, in a typical order of 45 items, five or six will be out of stock and therefore missing from the delivery. The out of stock problem can be almost entirely overcome by having a dedicated warehouse system, because as customers say in advance what they want to buy, retailers don't have to forecast anything ­ they simply order what they need. In theory, out of stocks should never happen and when they do, retailers are able to show customers the true position at the time of ordering because they have a real time picture of the inventory in the warehouse. At Webvan, US customers can see if the product is in stock or not when selecting or paying for it. And at Le-Shop.ch in Switzerland, out of stock products are highlighted in grey on the customer's computer screen which means they cannot be clicked and purchased on the site. While stores have implicit capacity constraints because of limited backroom space resulting in customers having to wait days for the next available delivery slot, stand alone warehouses don't face the same problem. Store picking is also disruptive to customers because it occurs in opening hours, with pickers and customers competing for the same products on the same shelves. Dedicated warehouses, on the other hand, are never seen by customers. Finally, stores carry different ranges, even within the same geographical area. This means store picking is unable to deliver a consistent range of products ­ again a situation which does not arise with warehouses. Given the pros and cons of these two approaches, in the long term retailers will almost certainly be forced to change from store picking to dedicated warehouses if only to achieve economies of scale that warehouse picking offers. The most important considerations are timing and speed ­ when to make the change and how fast. Retailers will have to decide whether the right skills should be learnt first, or rush to be the first to market but with a potentially substandard offering. Jacob Bruun-Jensen is a project manager and Jonty Shipley is a senior consultant at Roland Berger and Partners. {{FOCUS SPECIALS }}

Topics