In an environment of cut-throat competition, British retailers are battling to offer shoppers cheaper and faster deliveries.
But as online sales surge over the busy festive season, a split has emerged between companies seeking to win customers with competitive but unprofitable delivery options, and those trying to claw back costs.
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Ocado, the UK online grocery service, prompted criticism on social media after it introduced a £9.99 delivery charge in the week before Christmas, even for customers who pay a monthly fee. The group said it was taking on “extra staff and resources to make sure your Christmas delivery goes smoothly”.
John Lewis, the British department store that has seen online sales triple over the past eight years, this year introduced a £2 charge for its “click and collect” service, which accounts for more than half of its online deliveries.
“The whole piece on delivery is under pressure for retailers,” says Mark Lewis, retail director at John Lewis. “[We] want to ensure that this whole thing gets itself on to a more sustainable footing.”
Ocado did not respond to requests for comment.
With early figures showing online sales growth at record levels, the burden is increasing on retailers to find ways to limit or offset ballooning delivery costs.
Data from IMRG, the UK’s industry group for internet retail, shows online deliveries were 15.5 per cent higher than last year in October and 29.6 per cent in November, when shoppers flooded online over the discount “Black Friday” weekend.
This compares with 10.6 per cent and 11 per cent year-on-year growth in October and November 2014.
IMRG estimates that 1.6bn parcels will be dispatched by UK retailers in 2016 including “click and collect” services, returns and parcels from marketplace websites such as eBay. This is growth of about 16 per cent from last year.
Michelle Grant, head of retail research at Euromonitor International, says click and collect — whereby shoppers order online but collect in store — can protect retailers’ margins from the “huge” cost of online orders by eliminating “the last mile to someone’s door”, which she says is the most expensive part of delivering.
According to research by Bernstein, margins from online sales at Tesco are 1 per cent, compared with about 2.5 per cent in store for large grocers.
Richard Hyman, an independent analyst, says it is typically cheaper for retailers to sell products in store than online, despite the high costs of labour and rent.
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“If you account for taking the order, fulfilling the order, delivering and then dealing with the returns, in food the industry figure for how much it costs is £15 per order,” he says.
The large grocers typically charge £1–£6 per order.
Richard Clarke, retail analyst at Bernstein, says click and collect could bring online margins back up. He estimates it could reduce costs per order to about £1, or £2 per order for food retailers, especially if those with excess store capacity, such as Tesco, use the space for distribution centres.
Despite the challenges, some retailers are still introducing cheaper and faster delivery offers.
Since November, Amazon Prime members in greater London have been able to order items for same day delivery at no additional cost and with no minimum value. And shoppers in London, Birmingham and the northeast can order items for delivery within an hour for £6.99, which analysts say will not cover the costs of the operation.
“Amazon is in a phenomenally advantageous position because it ... can invest surplus funds in innovation … it also sets the competitive agenda for delivery which makes things difficult for other companies,” Mr Hyman says.
Ms Grant says consumers in the UK are more likely than those in the US to choose click and collect because the model has existed for longer in Britain. But US retailers are also turning to it as a way to deal with rising costs.
Target, the US department store, says it expects about 40 per cent of digital transactions this quarter to be picked up in store or shipped from store stock — its version of click and collect — to reduce transportation costs.
Target is offering free shipping without a minimum spend threshold from November 1 until Christmas, but its competitor Walmart will continue to limit free deliveries to orders over $50.
Jonathan Pritchard, an analyst at Peel Hunt, says the biggest challenge in the festive season will be for non-food retailers, which experience more “extraordinary” seasonal demand and higher levels of returns. According to Mr Hyman, returns are about 40 per cent in non-food retail.
“There’s only so much food you can eat but for non-food it’s going to be a case of extremely good forecasting systems to make sure they’ve got everything in place this Christmas,” Mr Pritchard says.
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