What happens when the fastest-growing part of your business is not profitable?

Supermarkets’ profits are diluted as the percentage of online grocery sales increases, but online grocery remains less profitable than in-store sales. The implementation of automation technology is crucial to the profitability of online grocery orders, along with their ability to meet consumer expectations. The successful application of these technologies involves significant capital expenditure initially, but will improve cost efficiencies and profitability of grocery e-commerce in the long run.

According to National Australia Bank (NAB), the online grocery and liquor category has recorded 14 months of continuous growth in sales, but still accounts for 4.1% of all food retailing (supermarket and liquor turnover) as at August 2020. Online sales for Woolworths accelerated by 41.8% in FY20 to account for 5.5% of its total sales, whilst Coles’ online sales grew by 18.1% in FY20 to account for 3.9% of its total sales. Bain & Company forecasts that 35-45% of online grocery spending growth witnessed globally during COVID-19 will continue post-pandemic.

To date, supermarkets have largely been fulfilling online orders from existing stores, picking and packing orders from the shop floors. Woolworths had been trialling a dark store (a conventional supermarket that are not open to the public but house goods used to fulfil orders placed online) strategy, but had only opened three dark stores so far, whilst Coles had opened only one.

The significant increase in demand for online grocery delivery and click-and-collect during COVID-19 has led to bottlenecks in capacity. The automation technologies that are being implemented by Coles (partnership with UK online grocery retailer Ocado) and Woolworths (partnership with USA eGrocery start up Takeoff Technologies ) should help alleviate some capacity issues. The two major Australian supermarket players have adopted different execution strategies of their respective new automation technologies. Coles plans to implement the new technology in large distribution centres whereas Woolworths is going down the micro-fulfilment path.

Micro-fulfilment – Woolworths

Woolworths has planned its first four micro-fulfilment stores, two in Australia and two in New Zealand, which will utilise Takeoff Technologies. The first micro-fulfilment centre (2,400 sqm) recently opened in Carrum Downs, Melbourne, sits behind an operational full-line supermarket. The new technology adopted is expected to dispatch five times the existing online order volume of a standard Woolworths’ store.

With more consumers expecting same-day delivery, the micro-fulfilment option allows for this last-mile delivery to surrounding catchments. Despite the comparatively smaller size of a micro-fulfilment centre as compared to a full-scale distribution centre, the technology adopted can hold up to 10,000 high-velocity SKUs (product lines). However, meat, fruit and vegetables are still being picked at the store by staff for the time being.

Distribution centres – Coles

Coles has pre-committed to multiple large-scale automated distribution centres, totalling approximately 200,000 sqm (average of 51,000 sqm each). These centres are all located on the eastern seaboard, with plans to deploy Ocado Technology in the next three years. Growth in online sales for the retailer is expected to remain relatively capped until the efficiencies gained with the use of technology can be utilised.  Woolworths currently has an advantage in online grocery distribution, with the automation technology already in use. However, in three years’ time, this may be a different story. The scale that Coles has already committed to, along with the almost pure automation route it is taking, may put it ahead of its main competitor.

It is unusual for the two leading retailers to pursue such different strategies. Both Coles and Woolworths have made significant investments in automation to improve online grocery profitability. From a property perspective, Woolworths’ strategy, which utilises existing store networks, reinforces the importance of retail real estate in the supply chain, whilst Coles’ strategy focuses on a more centralised method of distribution, which is more of a benefit to industrial property.

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