Welcome to supermarkets 3.0: Robots, AI and dark stores
It’s a little known fact, outside a small number of industry experts, that Coles makes no money out of selling and delivering groceries online. By the time store staff have rummaged around the supermarket shelves, picked the order and put it on a truck to deliver to the door, the profit margin has shrunk to zero.
The trouble is its online grocery sales are growing wildly, which means an increasing portion of its sales are unprofitable.
Coles’ announcement about how this will be addressed represents its first strategic move since the $20 billion supermarket operator left the Wesfarmers nest last year to become a standalone company.
It is about to catapult itself into a digital cutting edge retailer and leapfrog other Australian supermarket chains on online sales technology. Robotics, artificial intelligence, dark stores and state of the art software will soon sit behind the online offer.
But Coles thinks it can add another $1 billion of online sales with this new system, and provide a better online experience for shoppers.
It has enlisted the services of a UK company, Ocado, that has made its mark in this space by disrupting traditional supermarket chains like Coles, but in other places around the globe.
From the customer’s perspective, the online experience is being billed as something of a revolution rather than an evolution.
They will get access to a much better (even a complete) range of Coles products with enhanced freshness, additional delivery windows and with a website that (they promise) won’t be clunky.
Chief executive Steven Cain won’t project too much into the future to tell us what this might mean for its investment in bricks and mortar stores.
At this stage the majority of upcoming capital expenditure will still be funnelled into new stores, refurbishments and the distribution centres that feed the physical stores.
So this strategic mini-pivot won’t come at a cost to its existing focus on supermarkets and liquor.
But if Coles is planning to capture another $1 billion in online sales, those sales will need to come from somewhere.
The experience from the UK indicates that the regular online customer will likely use the same supermarket brand for its bricks and mortar purchases – given they understand the range.
So Coles must be hoping that a superior online experience will lure customers from its competitors. And perhaps more importantly, Coles and Woolworths are aware of the need to protect themselves from the master of online – Amazon.
(Supermarkets say that the online customer is a valuable one because they are also big in-store shoppers.)
But ultimately if the margin on online sales matches the margin on in-store sales, Coles would be channel agnostic.
And while supermarket online sales remain only a fraction of overall sales (about 3 per cent for Coles) they are growing fast.
For its part, Woolworths doesn’t tell investors the margin it makes on online sales – only that it is smaller than store sales. Both supermarket chains make some profit online if one includes click & collect shopping.
“Online in its various manifestations is profitable for us as a group,” Woolworths chief executive Brad Banducci said last month.
“It is, however, percentage margin diluted as you might expect, but what we do know is that it is not a full cannibalisation of a store sale.
“In terms of the economics, they’re continuing to evolve for us. It is now becoming a very material business for us and as it grows we are getting better and better with our underlying processes for meeting that need,” Banducci said.
He described the growth in online sales as a key customer trend and noted that Woolworths needed to follow the customer or someone else would.
It looks like Coles boss Steven Cain has already had that idea.