Strategic and Economic Analysis of E-Grocery System in Tesco and Sainsbury
Online shopping and home delivery systems become most famous in recent decades. Online grocers have been testing various business models with altering results. This research study is carried out in two main grocers of the UK (Tesco and Sainsbury). This research study conducted Case study and historical data, and meta-analysis to identify current strategies and business models of e-grocery which contributed to their success. Both companies’ management styles, expansions strategy, market selections strategy, order-processing and picking methods, home delivery methods, website design and different strategies for customer relationship management are explored and evidenced the successful factors. The findings reveal that online grocery knowledge and experience in grocery business play a significant role in E-grocery success. Using slow and steady expansion with careful investment helps online grocers to stay in game. The In-store picking method is more profitable and suitable for e-grocery business. Understanding customers, wants and needs will provide tremendous opportunity for business expansion.
1.1. INTRODUCTION: –
This chapter provides general background, problem statement, purpose of study, research objectives, major research questions and structure of dissertation.
1.2. General background:–
From many decades many groceries and also many manufacturing companies are providing delivery services to customers. Home delivery of household goods is not a recent concept in grocery retailing sector. However, until 1990s e-grocery was not potentially recognisable business channel, when grocers introduced internet based online ordering facility it revolutionised whole grocery industry (Papiernik, 2000).
Nowadays, not only pure-play industries offer e-grocery services but also many more supermarkets offering e-grocery service. E-grocery’s continuous and fast growth is capturing market share from traditional retailers. Many of grocers have tried online unit and some of them are successful and some of them have failed in the history of grocery retail sector. For example, online grocery business is judged to show sales figure. The estimation shows that, about 0.3% to 0.7% of total sales in UK and 0.2% of sales in USA. (Kumar, 2001). The e-grocery market value is estimated at €450 to €1,000 million and $900 million in United States.
1.3. Problem statement:-
On one hand, many customers are interested to do online shopping for their household goods, but yet they are not interest to abandon shopping in-store in traditional way. Most of the people still believed that, online shopping is too expensive. On the other hand, many more industries also have made their effort to build online stores by providing this extra service to the customers. Organisations are continuously striving hard to build different strategic approaches for fulfilment of orders in profitable way. However, online unit business will add extra expenditure to grocers with or without some nominal charges. The profit margin is comparably very low in e-grocery to traditional one. Many grocers have undertaken to provide online shopping experience for their customers with different strategies. Profit margin is very low and sustainability in this industry is difficult. In the history of grocery sector many more companies have introduced online shopping and home delivery units and have failed.
1.4. Purpose of the study:-
The online shopping and home delivery is still in an emergent phase. E-grocery business is very challenging field and it provides an extraordinary opportunities for business. E-groceries have made many more efforts to implement various strategies and service concepts, there is no much research carried out in this area. This research study provides insight of e-grocery methods in retail sector, identifies operating strategies and strategic and economic analysis of home delivery methods in Sainsbury and Tesco.
1.5. Research objectives and significance of the study:-
This research study will be carried out to analyse the current strategies and economic implications of e-grocery sector in Tesco and Sainsbury. The main objective of the study is to determine whether home delivery is strategic and economic contributor to company or not. The research also seeks to perform business models of the e-grocery system. The dissertation will provide the best strategic implementation method for online grocery systems in companies which will result in profit. Another objective is to determine business model for order processing. This study will focus on order picking and home delivery of the goods.
1.6. Structure of dissertation:-
The dissertation is structured into five chapters.
Chapter 1: – This chapter provides general background of online grocery shopping and home delivery system, problem statement, purpose of study, research objectives and significance of the study, and outline of dissertation structure.
Chapter 2 – This chapter provides literature background for e-grocery system. The literature describes customer base critiqued on the basis of different characteristics, online market share and trends and customer relationship management.
Chapter 3: – This chapter presents research methods used to analyse the research aim and objectives. The research is carried out with qualitative analysis. Analysis is carried out using two methods, firstly case study and historical analysis, and secondly Meta analysis. Both are used to identify strategies, models, and success and failure levels of industries.
Chapter 4: – The fourth chapter confers finding of research, analyses the data and shows the results.
Chapter 5: – The final chapter draws the conclusion for overall report and also proposes possible future research in online grocery field.
2. LITERATURE REVIEW
The literature reviews the operational and strategic analysis of E-grocery systems. There are many business models in E-grocery business. To make E-business model a sustainable one, they are using different strategies in different targeted markets. Each individual model varies from the other in various dimensions such as placing of order, assembling and delivering the goods. The first part of the literature provides statistical description of online grocery industry in various geographical areas and measures. The second part provides review of the E-grocery industry’s market and its customer base. The final part offers previous studies, opinions and factors about various outcomes of e-grocery business.
2.2. Industry overview:-
Over last five decades grocery business has transformed into new sector of supermarkets in UK. Many of the supermarkets have changed the grocery field dramatically. These champions of consumers have brought vast choices in product and price to improve their business sector. Online grocery shopping and Home delivery system has become one of major aspects in grocery industries. The revolution of technology advancement in internet has promoted grocery industries to embark on new methods in retailing industry. However, many grocers have been unsuccessful to consider the advantages of how it can support grocery business. These developments have lead to dismissal of complete-online supermarkets such as Web-Van, HomeGrocer, Shoplink and homeruns (Ramus and Nielsen, 2005). These results demonstrate the necessity of careful crafting of e-grocery strategies which exploits internet technology’s potential of increasing company profit and also customer service (porter, 2001).
On one hand, strategy conceptualisation is difficult for pure-play grocery stores since companies have not tried business models before. On the other hand, formulation of strategies for clicks and bricks grocery shops requires strategies which will combine both existing retail practice and internet based shopping processes (Teo, 2002). Online shopping or e-grocery retailing service involves customer’s online buying behaviour and practices, order fulfilment and delivery of order, development and maintenance of online websites to facilitate customers to enter their orders (Hong and Kim, 2004). This literature provides insight of into e-groceries and their strategic methods.
2.3. Development of home deliveries in the UK:-
In United Kingdom, from centuries home delivery of goods has been taking place. During 20th century some local door to door field sales and home deliveries went down due to rise large number of retail centres and also availability of cheap cars. However, some of the home delivery business still in existence such as milk and catalogue distribution etc. The innovation of large consumer products such as washing machines, dishwashers, refrigerators, televisions etc resulted in certain type of delivery methods after mid-twentieth century. (Spufford, 1994)
The recent development of information technology has contributed many new methods to retailing sector over the internet which has drastically increased the demand of home deliveries. Online shopping and home delivery has become an ideal path or approach in a society where people themselves believe they are cash-rich and time-poor for grocery or household goods. E-commerce along with some other forms offers the opportunity for consumers to buy household goods from their homes and also to receive deliveries at their flexible timings rather than travelling to stores. (ibid)
2.4. Grocery and grocery industry:-
Groceries and other food retailers function each and every day, yet it is fundamental and permanent industry sectors in the business world. Everybody requires food, thus everyone must and should purchase food from one or another retail outlet. Therefore, the grocery industry is a vast, fragmented and tremendously competitive environment (Kelly Delaney et al, 2003 pp 187).
“In Great Britain, food retailing industry constitutes 36 percent of overall retail turnover annually (Central Statistical Office, 1990). In United Kingdom the largest individual category of family expenditure and along with some other groups, which are partially sold in supermarkets, like household goods, tobacco and alcohols, clothing and leisure goods for a considerably large share of customer shopping (Central Statistical Office, 1991).” (Russell Aylott et al, 1998, Pp.363)
2.5. Customer base and market trends:-
According to Verdict (2006a), 80% of the online shoppers were of 29 to50 age group in 2002. Majority of responded shoppers were females. There are three groups of online shoppers: firstly rich and busy people who are pressed for time, secondly families with one or more young children and thirdly people who find difficulty to get into stores. The first group of people are those who have higher income and less time to shop. These people are normally high internet users, technology comprehend or family with dual income. These rich and busy people prefer someone to shop behalf of them. The second group are those who have got young children in their families. They constitute higher number of e-grocery shoppers. The age group of e-grocery shoppers is 29 to 50 years old with at least one young child under five years of age. This group of people usually spend their time in cooking dinners for their family. Therefore they prefer shop online for regular household groceries. This category of people wants to avoid hassle situation at stores by dragging kids along with them for shopping. The final group is comparably small to other two categories. This group of people are those who find difficulty to access the store environment due to several reasons like age or physical disability etc. People’s average life span has increased in recent decades comparing to 1950s and 1960s. People’s average life span has increased from 67.8 to 77.2 in 2007 and the estimated life span is 82.4 for 2015.Aged people and physically challenged people may need little more extra help while doing shopping. They may found it as difficult to drive to supermarkets and to carry heavy household goods back to home. Online shopping will be the good alternative source of grocery shopping for them.
2.6. Estimation of home delivery shopping market and market share:-
In the year 1999 the total home shopping market worth was figured at £12.36bn in the UK market. The projected view for 2004 was £24.12bn. All sectors have experienced by considerable growth. Constant increase has been expected for following 5 years as customers accept different new channels for purchasing of goods. Traditional grocery shopping is a matured market. However, recent developments and growth predicts that, it has been generated by potential e-commerce and majority of grocers have converted a part of their business into e-grocers. UK e-shopping was £581m worth in the year 1999 and estimated growth of £1.53bn in 2000. Verdict research predicted that there will be huge growth of 3.36% of total sales in online market and it was estimated as £8.84bn by 2004(Nielsen, 2000).
2.7. Market trends in home shopping:-
E-commerce growth in recent decades (excluding some declined cases) has transformed old traditional companies into technology implemented new companies. Moreover, now companies are in better position to exploit and implement new technologies to business models to grow their sales and profit. In the starting days of internet technology there were comments from academic commentators that most of incumbent businesses were unwilling to try internet for sales channel. There was lack of internet knowledge and also uneven distribution of amount for physical distribution. These companies distribution infrastructures have their brand names and customer base which will help them to command and access the funding, and provide stronger position to embrace e-commerce (Anderson consulting, 2000).
If we consider present situation, majority of internet user are males compare to females. This socio-economic difference in internet profile user also affects online shopping. Along with these higher proportion of society contains children and youth who currently own their own computer systems and access internet more than older generation. However, research depicts that some of these variations may diminish over the growth of technology. For example, the prediction of women internet user by the 2005 will increase by sixty percent of total UK online users. (Tesco 2000a; Tesco Annual Report, 2000).
Many more established retailers are likely to adopt a new approach, Multichannel retail sector implementation and development, in future. Already there are alternative channel development methods by many large retailers. It will also permit retailers to create alternative channels to draw supply chains and resources from their existence channels. For manufacturing companies it will provide good opportunity to access customers directly and to formulate new methods of delivering service or product. There is an expectation of launching of new niche catalogues from major drivers in UK as growth rate penetrates. (Webb, 2000).
2.8. Geographical characteristics:-
Sandoval (2002) mentioned analyst Robert Rubin said that average population density in UK is high compared to ones US. The US (31 per sq.km) population density is one-eighth of the UK (248 per sq.km) in 2004 (world population prospectus). Tesco and Sainsbury have become successful e-grocers in the UK. These grocers target highly populated urban areas for more potential consumers.
Urban areas are densely populated, people reside very close. In large cities there are less people who own cars. There are other factors which influence online grocery shopping in urban areas such as busy lifestyle, highly crowded shopping malls, public transport dependence for transportation and higher income.
According to Mclaughlin (2005) cities are highly populated with internet users and considerable residents with disposable income. It is difficult expand online shopping to system to all geographic areas instead it could be done from one urban area to another, expanding business like this will make company delivery truck to achieve high number of deliveries at every trip.
2.9. Psychographic characteristics:-
Punakivi, M., & Saranen, J. (2001) mentioned five major decision elements for online shopping (price, convenience, product variety, ambiance and service). He also stated several reasons to increase online shopping chances such as changing family structure, busy work schedule with increased working hours, less free time and time consuming traditional shopping methods. This social system transformation result in search of alternative independent grocery shopping methods. Customer with different disability made their interest towards e-shopping rather than traditional one.
Woodside, Arch G. and Randolph J. Trappey (1992) mentioned that time and conveniences are the two major factors for people to switch from traditional shopping methods to electronic shopping methods. Technology should provide complete product description to satisfy different types of customer base. It may depends on several criteria such as different food preferences such as organic, religious, ethnic origin etc
2.10. Technological characteristics:-
Punakivi, M., & Saranen, J. (2001) states that, the food marketing institute indicates US consumers are highest internet users with eighty-six percent in that seventy percent will shop online daily. Whereas in the UK, broadband user are in fifth position in world and second position in Europe. E-commerce research 2007 shows 15.9 percent respondents brought groceries once in a week, 2.7 percent shops twice or thrice a month, largest group shops once or twice in a year. Increased internet users likely contribute the growth of online shopping. Online shoppers will make more shopping than in-store shoppers.
“As the economy and society have changed, so retailers have responded and shopping as an activity has altered enormously.” (Dawson and Broadbridge, 1988). Online shopping is comparatively a recent phenomenon, which provides an opportunity to consumers to carry out at least one part of buying process online.
“Electronic grocery shopping has been defined as shopping when at least part of transaction is started electronically via third party services or the Internet, but paying and logistics are not necessarily performed digitally”. (Carl Lewis, 2003-pp.207)
E-shop business model represents one class of e-commerce where buyers and sellers interact electronically with each other, except for deliveries. Burke suggests many reasons web marketing of food. As an example, everybody has to eat, and in store shopping consumes considerable time to purchase and majority people do not like grocery shopping.
Daily household goods are difficult to move physically from one place to another. Continuous growth of e-commerce enlightens many traditional grocery retailers to use internet channel to sell their goods. The development leads to many more conventional retails to enter into e-grocery field (Boedeker.M, 1997).
2.11. E-Customer Relationship Management (E-CRM):-
2.12. Success and failure factors from previous studies:-
Friends of Earth (2005) believed that e-grocery method is the best way to promote industry’s brand image. However, Punakivi, M., & Saranen, J. (2001) and Kotler (1996) stated conversely; brand image of company will help to promote online grocery business. They also believed that industry’s business experience and its infrastructure will be added advantage for promotion. One more factor is people ability to spend money for long duration household goods.
Pachauri, Moneesha 2002 stated that competition in e-grocery retail sector remains the same until company stay in game. If any child company’s online business started down falling then parental company may not let it to happen for longer duration because they are inter-related in means of profit sharing. Without the demand, services of online business company will lead to business failure. Retention of existing customer is one of the main aspects of business. To gain customer loyalty, companies should provide reward to regular shopper. Customers can also gain loyalty points for their spending and it will convert into reward coupons or vouchers. Brick and mortar stores utilises their existing business infrastructure to click and mortar stores to save on costs.
Delaney-Klinger, Boyer, and Frohlich (2003) mentioned Tesco’s success and Webvan failure because of its marketing strategy for online business. Webvan marketed its online sales with value-added service and extra delivery charges to cope up with online ordering cost. Tesco’s pricing strategy is little higher than the Webvan and it most suitable one for lower volume sales.
Smith, Howard (2004) stated that online-only business spent heavy money for their highly automated warehouses. The operating costs for these warehouses are high and order volumes for those companies are not more than half of their capacity. High initial start up cost for online division, although pricing strategy can able to reduce cost for internal order picking and delivery methods. However, Delaney-Klinger et al (2003) believed that the expenditure for short run will increase business cost for warehouse methods and decrease for existing store picking methods comparably. High initial start-up cost will results at higher risk for any organisation. Another aspect for failure will be lack of online business management knowledge and experience. Blythman, Joanna (2005) stated that, companies are not concentrating much on customer relation management for stabilising business consistently. Traditional grocers have more advantage over online grocers in this area.
Online shopping and home delivery service is one of the critical aspects of e-grocery business. E-grocery business should have to understand the variable cost affecting structures and service concepts in order to turn online grocery business into profitable one. The different strategies were discussed. Analysing and adopting best strategy for e-grocery business is most important. This literature provides insight of e-groceries. In a service context, as with product marketing, getting and keeping customers is of utmost importance. With service, in particular, someone within the organization will interact with customers; hence they should be viewed as customer relationships not just customers. Customer relationships have to be built and a useful way of viewing these developments as a life cycle. The marketing objective will change as the customer proceeds through the cycle. Understanding service marketing is becoming increasingly important for all organizations as more firms seek to differentiate their product or services through their service offering. Interaction and customer relationship concepts are the two key areas of service marketing are said to be of even greater importance to all firms in the future.
3. RESEARCH METHODOLOGY
3.1. Research topic: – – Strategic and Economic analysis of E-grocery system in Tesco and Sainsbury (Online shopping and home delivery methods).
3.2. Background of home delivery system and its characteristics-
Home delivery is generally defined as delivering of all types of goods to customers’ homes (or any different location opted by customer – example workplace) regardless whether online or any other order forms such as traditional mailing, telephone-based ordering (phone order), internet, fax or order made in person by consumer in store premises. The study is carried out in business to customer order delivery system rather than business to business.
Home delivery system refers to all household goods delivered to consumer’s house (the destination may change such as work place on customer’s selection). Hence in online shopping and home delivery method the purchased physical household goods are carried out to customers’ destination by specialised home delivery unit or companies instead of customers themselves. There are some reasons for home deliveries like (i) may be the retail outlet itself would provide an additional service to their customers or ( ii) may be customer do not like to carry the shopped goods at that instance or the required product may be out-of-stock at that moment or (iii) due to goods weight or size ( if it became difficulty to customer to transport by themselves) or (iv) because the seller itself does not have any physical store and may be its complete operation depends on the virtual online store. Thus customer may face impossible situation to collect the goods in store by themselves. (Farahmand and Young, 1998; Nielsen, 2000)
3.3. Research aim and objectives:-
3.3.1. Aim: – To analyse the strategic and economic factors of e- grocery system in Tesco and Sainsbury.
Hypothesis: – Home delivery system is neither a profitable nor a strategic contributor to Tesco and Sainsbury.
3.3.2. Research objectives:-
The objective of this study is to find out and explain empirically the above mentioned research issue by using various research methods. Our approach is comparative in nature. The steps adopted in our study are as follows:
- (1) Identification of the industries under study;
- (2) Study of background of the industries;
- (3) Interpretation of appropriateness of strategies and methods of individual firm;
- (4) Analysis of home delivery methods’ impact on organisational performance from individual firm.
This research study is carried out to understand the factors of e-grocery success by trying to find answer to following research questions.
- What are Tesco’s and Sainsbury’s online units’ strategies to its success?
- What are the business models they are following? How are they processing their order? Should they use warehouse system or in-store picking system?
- Whether home delivery system is profitable or not?
- How should online unit function to achieve operational efficiency and how they are managing customer relationship?
3.4. Research Approach and methodology:-
Research data collection is carried out both quantitatively and qualitatively. It will become difficult to distinguish between these two methods. Generally quantitative research method means collecting numerical data or coded information for objective analysis, data will be later interpreted.
Qualitative research method is data collection by observations by people’s activity generally and they are noted in coded description. However, this codified information can be used for later analysis. The important form of this method is often reporting and interpretations by researcher by timely observation.
A semi structured interview will be carried out during research which consists of analysis of Sainsbury and Tesco stores for data collection about home delivery. Interviews will be carried out with key persons like grocery manager, online delivery driver, and duty manager etc in each store to collect the quantitative and qualitative data. The quantitative data will be gathered for analysis. And results will be drawn from the following methods.
This study uses semi-structured quantitative primary analysis (interview for data collection) and majorly uses qualitative method (secondary source) to identify UK grocery sector and to focus to answer research questions stated. Interviews will provide large amount of information which is main source of information and key pathway for time-constrained studies such as this (Esterberg, 2002).
3.4.1. Case study and historical analysis method:-
According to Yin (1989), there are mainly five major investigating methods in social science research namely surveys, archival analysis, case studies, experiments and historical analysis. He also distinguishes them on the basis of three criteria; those are i) what kind of research question will be asked, ii) what will the degree of control over present behavioural consequences and iii) present emphasis compared to past events. Case studies and historical analysis are desirable approaches to evaluate strategies of organisations. These methods are useful to describe and answer the “how” and/or “why” scenario when events happen beyond researcher control and also while researching present phenomenon in real-life time.
Inductive and deductive approaches will be used for analysis of research data. Inductive way means drawing the general conclusions from researcher based on empirical grounds. Deductive approach means drawing the conclusions from researcher’s logical reasoning (Ghauri, et.Al,. 1995).
This study focus on collecting information regarding operational strategies of Tesco and Sainsbury and to understand, why they are providing online shopping facility to customers while many of the supermarket failed to stay in game. During the process of study, the companies’ actions or strategic implementations from them are beyond the control of researcher, case study and historical analysis methods will be best, for a part of research.
On this part, research study is carried out through qualitative meta-analysis for selected e-grocery organisations. Answers to main research questions will be collected qualitatively for each individual case (Lyons, 2003). The collected data will be analysed and possible relationships between business models and various out comes will be fetched out. This method is used to compare operations characteristics and strategies of Tesco and Sainsbury from the gathered data. This is the systematic approach for cross comparison of business models.
There are few draw backs in meta-analysis such as, since data collected from various sources, hence, results’ quality is directly depends on the quality of source. Another, may companies may use similar strategic approach to achieve their goals which may be rarely identical. There is no unique approach to analyse data for meta-analysis. This effort is made to reveal answers from confirmed information from various sources (Graney and Engle, 1990).
3.5. Significance and limitations:-
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