Is click-and-collect 'cannibalising' retailers?

By Tom Espiner
Business reporter

  • Published
Gerard Logan as Byron being Nosferatu

In the classic poem by Goethe, a young sorcerer's apprentice unleashes forces he can't control.

In an attempt to make life more convenient, he bewitches a broomstick to mop the floor.

When that gets out of control, he tries to stop the whole process by splitting the broomstick in two - but that just creates two brooms, and doubles the problem.

Is that what retailers have done by offering traditional location shopping alongside online?

Click-and-collect is a fairly new battleground for UK retailers, and promises rich rewards for daring firms.

It has been hugely popular over the past five years, as customers embrace the convenience of being able to order goods online and pick them up in store or elsewhere.

Online boom

John Lewis announced this week that it would start charging a £2 fee for click-and-collect purchases costing less than £30, after finding that its current free model was unsustainable.

Click-and-collect demand has boomed for the department store.

It now processes more than six million click-and-collect orders per year, compared with just 350,000 in 2008, and moves tens of thousands of parcels every night.

A spokeswoman said John Lewis had seen a 32% growth in demand for the service so far this year.

And the seemingly effortless method of shopping is anything but for retailers as it needs an army of behind-the-scenes pickers and delivery staff.

John Lewis is having to move fast to cope with demand. But it is not alone, according to Andy Mulcahy of online retail industry body IMRG.

It estimates a 20% per year growth rate in click-and-collect across all retailers.

For retailers that sell online and also have physical shops, click-and-collect accounted for 4% of online sales in 2010. That figure jumped to 17.7% in 2014, he adds.

John Lewis is in a position of strength, but this growth is causing significant problems for some retailers - especially UK supermarket giants, according to some retail analysts.

The phenomenon is adding to supermarkets' woes, rather than easing them, says Marc de Speville, the founder of Strategic Food Retail.

'Online cannibalisation'

Free click-and-collect is "clearly a burden on supermarkets' already slim margins, as it does not bring in nearly enough incremental sales to cover the extra costs involved," Mr de Speville says.

Even Tesco, which charges £4 for click-and-collect grocery orders below £25, still has to heavily subsidise orders above that, he says.

"All the major brick-and-mortar supermarket groups face the same problem: whether orders are picked up in store or delivered to the home, online adds considerable cost and complexity, but very little in the way of additional sales," he adds.

Supermarkets face many pressures on their profits, including a bitter price war, and having to try to regain market share from discounters.

But the more the online market grows, the more margins will be diluted, he says.

And what's more, there are "dis-economies" of scale, he adds.

Once online sales account for around 10% of a store's sales, picking of products has to be moved out to dedicated warehouses or "dark" stores.

This can duplicate running costs and means customers are less likely to visit physical stores, making them more of a drag on profits, Mr de Speville says.

"I see this 'online cannibalisation conundrum' as an even greater long-term threat to supermarkets' profitability than competition from the hard discounters such as Aldi and Lidl," he adds.

Supermarkets also face a much bigger challenge than other retailers, Mr de Speville says.

Grocery orders are much more time-consuming and costly for the retailer to fulfil than general merchandise.

Image caption,
Online sales can mean picking of products has to be moved out to dedicated warehouses or 'dark' stores

Sorcerers or apprentices?

So far, retailers have been split into those who have made click-and-collect work, and those who haven't.

And so far, supermarkets have been firmly on the losing side, says Phil Dorrell of Retail Remedy consultants.

"Any complexity just costs more," he says "If [click-and-collect] is not offset by an increase in market share, it's not really worth it."

For example, Asda "piled into click-and-collect" and was "very ambitious" in its targets, but it's "been a bit of a side show" for the supermarket giant, says Mr Dorrell - Asda has continued to lose market share.

"Their race towards click-and-collect hasn't done them any favours," he says.

Likewise, Morrisons "at best has been testing the water" - the supermarket chain is "not fussed about click-and-collect", and has concentrated on improving its stores - but it also has lost market share.

Success stories

By contrast, there are some retailers which have really made click-and-collect work, he says.

Fashion retailer Next has been "a game changer" by being "brave and exclusively customer-focused", Mr Dorrell says.

"Next don't really put a foot wrong," he says.

If you order from Next by 10 o'clock in the morning, your order is ready the next day, he says.

Amazon has also been "doing fantastically well", he adds, pointing to the "awesome" service of one hour delivery that is being trialled in London by the company.

The common characteristic of the success of both retailers is strong leadership, which is even more important than efficient distribution and timeliness in the market, he says.

"It's about being able to see where the market's going, and being able to make strategic adjustments," he says.

So, can retailers control the powerful magic of click-and-collect shopper convenience, or will they end up being swamped?

One thing seems certain: the problems for those who don't get it right may take more than a wave of a wand to fix.