For historians of the internet, here is a short series of pieces written by Glynn Davis for The Guardian back in the days of the dotcom boom.
This one dates back to May 2001 and features John Browett, former head of Tesco.com, talking about online grocery selling.
Tesco.com: strategy not that clear in early days
The managements of supermarkets are not renowned for their gambling prowess but five years ago, Tesco took a bet on how it should develop an internet shopping business.
The choice was to either pick from its stores the goods that people had ordered online, or to build a series of warehouses dedicated to internet shopping orders. Putting its money on the former has enabled Tesco to become the world’s biggest online grocer and leave in its wake a group of envious retailers around the globe.
John Browett, chief executive of Tesco.com, recalls a recent conference in the US where the company was given the main speaker’s slot and asked to explain how it had built up a business with annual sales approaching £300 million and profitability just around the corner.
“The large US grocery chain Albertson’s said during the conference that if it didn’t figure it out soon, it would want to work with us,” says Browett proudly.
Tesco’s success started with that gamble. “We took a bet – stores versus warehouses – and we were right.” He believes that it would be viable to use warehouses if 50% of the UK was shopping online, but the economics of warehouses doesn’t yet stack up. Although successful, Tesco’s online shop has still captured only 0.25% of the UK’s total grocery market.
Browett says other retailers such as Sainsbury’s and Asda Wal-Mart in the UK predicted that by now 10% of the grocery market would be transacted online but it hasn’t happened. As a result, the investment in warehouses has proved a costly exercise with no sign of rewards.
John Browett, former CEO of Tesco.com
Among those believing the hype was Asda Wal-Mart. It is understood to have chosen warehouses because consultants advised that it would only be possible to pick a maximum of around 300 orders per week from each of its stores. However, Tesco is already picking up to 350 a week in some of its busier outlets and Browett believes it could multiply its online volumes 10 times before it needed to build warehouses.
Asda and Sainsbury’s are not alone: the US is also littered with online mistakes. They include: Peapod, which has reined in its plans for a countrywide service to focus on core markets; Webvan, which has recently cut its workforce by 885 and needs to raise further finance to survive; and Wal-Mart, which has invested $100 million in its partnership with the venture capital firm Accel Partners to little effect.
In contrast, Browett says: “Our key insight was that we questioned how quickly we would be able to get to a high penetration of online shoppers.” Not that quickly, was the answer.
Having chosen a store-based strategy, Tesco was able to concentrate its efforts on making it work. “We had to go into the stores to work out what we were going to do,” says Browett. “It was tricky and we spent a lot of time getting the model right, initially at a small number of stores.”
Such was the support of the Tesco top brass that, after two-and-a-half years, Tesco.com is the longest development project undertaken by the company. Usually, projects are scrapped after six months if they have not started to contribute to the bottom line.
Unlike other retailers, which tried to roll out chains of warehouses before there was sufficient demand, Tesco took one step at a time, ironing out problems and tinkering with its model before rolling out its internet service.
David McCarthy, food analyst at Schroder Salomon Smith Barney, suggests that although execution has not always been that good at Tesco.com, customers have always recognised it as a good idea and Tesco has therefore persevered. He adds: “It has been at it for years behind the scenes. It is like a retail decathlon. There are 10 different events and, even if you only win each one by a small margin, it all adds up. Tesco has done it quietly and done it right.”
Browett agrees that its success is based on a combination of things and that these are difficult to get right. He likens it to running a superstore where the customer simply sees the food on the shelves but doesn’t appreciate the complex engineering hidden behind the scenes.
Elements Tesco has got right include automated carts in-store, which are used to pick goods. Orders are beamed on to the picking carts, which advise the operator on the most efficient way to navigate around the store. “Nobody else is doing this. It’s a puzzle why people don’t understand industrial processes,” says Browett.
Tesco is also the first company to develop technology to show customers one of 240 different websites depending on which store will deliver their goods. This enables the company to offer a wider range of goods – up to 40,000 lines – compared to its competitors, which may only have a core range of goods that they can guarantee are available in all their stores – around the 10,000 level.
This can lead to lost sales, says McCarthy: “If you can’t get your strawberry cappuccino from one retailer online you’ll probably shop elsewhere.”
Another benefit for Tesco is that these additional products are often the higher margin goods. These include fresh and own label goods, with the top-selling item online being skinless chicken breasts. This has made the average basket size online four times larger than that in its stores. And McCarthy calculates that as much as 40% of Tesco.com’s business has been poached from its competitors.
However, Richard Hyman, chairman of the retail consultancy Verdict Research, still believes this approach is limited: “If you live next door to an all-singing, all-dancing store, you can get everything you want, but if you don’t, you have a much more limited choice.”
A mere 60,000 deliveries per week in 2001
But the numbers suggest there are plenty of people willing to use the service. Around 60,000 deliveries are made each week using Tesco’s fleet of 600 vans that dispatch goods from the group’s 240 stores to 90% of the country.
And these numbers could increase dramatically since Tesco plans to offer a greater range of non-food products, such as electrical equipment, that it is unable to stock in its smaller stores.
“We’re excited about this opportunity as planning constraints (for large stores) make it difficult for us to do this in many of our stores. It is a fantastic opportunity to be free from the constraints of real estate,” says Browett.
Unfortunately, Tesco’s competitors such as Asda Wal-Mart and Sainsbury’s, with their warehouse strategies, are far from being free from such constraints and a switch to a store-picking model will take some explaining to the City.
Browett says: “The underlying argument for warehouses is beguiling and in the City we banged on about it but, generally, now accept the store-picking method. We proved the pundits wrong.”
This may be so, but Hyman questions whether Tesco’s success will ultimately bring it great rewards: “It is a winner but there is a question of how big a race it will prove to be a winner of. We still believe that only 5% of food purchases will be made online by 2005.”
Even with this lowly forecast, Tesco will still make a decent return as it expects to make a profit from its online business by the end of the year. And, with the supermarket giant in gambling mood, there would probably be few people in the industry who would bet against it continuing to set the pace with internet shopping.