Talk with Tesco.com CEO Laura Wade-Gery
But Laura Wade-Gery, CEO of Tesco.com, wasn't going to let a few million tons of volcanic ash get in the way of telling about the leading UK retailer's eCommerce success story.
In less than ten years, Tesco plc has built the UK's largest online business. Today, Tesco.com net margins rival the internationally high levels the grocer achieves in its stores.
Last year, Tesco's internet arm posted revenues of around €2.5bn and earnings of €160m. That's impressive by anyone's terms, but still quite small within the overall Tesco universe (2009/10 group sales: €73.6).
Tesco bricks & mortar have been going a good deal longer though! Already more than one million UK households regularly order around one billion items every year via Tesco.com.
There is nothing remotely like this in German food retailing, which is mighty strange. After all, Germany has a high level of internet penetration and its inhabitants are generally tech-savvy, time-stressed and prosperous.
"A joint venture wouldn't be our preferred option"
Ms Wade-Gery, how near is Tesco.com to achieving a similar level of profitability to that of its stores?
We aspire to be as profitable as our store business and already achieve similar levels. In our financial year 2009/10, our online business generated total sales of around €2.5bn. About €1.9bn of this came from food (Tesco.com) and about £350m €412m from non-food (Tesco Direct).
To what extent is your online business fully costed? How high is the marginal cost contribution from within the Tesco group?
Here you must differentiate between our online grocery and non-food business. Tesco Direct employs a centrally-fulfilled, warehouse-based model, which is clearly separate from the stores side of the business so that costs can be allocated clearly.
Although we already have two, and this year will have three, dotcom-only fulfilment centres, the Tesco.com grocery model is largely based on picking orders within the stores. Here, as a rule of thumb, we charge the business with any incremental costs which our dotcom business causes or incurs at store level.
What do you mean by “incremental costs”?
We are not charged for store rents, but we do pay the cost of replenishing online orders on the store shelves as well as for the extra delivery costs to the stores themselves. We do not carry the costs for anything which would have occurred independently of our business, i.e., things like rent or a store manager’s salary.
But obviously we do pay the salary of the manager responsible for home shopping within the store as well as the cost of the dedicated staff that we employ to pick customers’ shopping. Clearly, we also pay for our delivery vans and their drivers. For our two dotcom fulfilment centres we pay all the costs -- including rent and rates.
Can you still make a profit at these new fully-costed fulfilment centres?
Yes, the second one we built in Aylesford in Kent is the kind of model we think we will roll out in future and it is already making a positive contribution after only 15 months of operations.
Why do you pursue a different model to Ocado which uses a single centralised warehouse with a high degree of automation?
We don’t comment on our competitors on principle. However, all I would say is that they have accumulated losses of around €471m to date and in 2009/10 our online grocery business generated €160m in profits.
How do you reduce picking costs within the stores?
We have devoted a huge amount of time to making both the process and the system simple and efficient for our staff. For example, our in-store pickers are in charge of a trolley with six individual trays on it. Those trays could be for six different customers. Obviously, this reduces the amount of walking since the tray will be full within a couple of aisles…
But surely this also introduces a considerable level of potential inaccuracy when individual items are placed onto the wrong tray? How do you ensure that the individual items ordered actually go onto the right tray?
Originally, to simplify the operation, we labelled them with numbers. However, we soon discovered that numbers, such as 366 and 369, look quite similar when viewed from the side.
So we’ve done a very simple thing. We’ve labelled them with colours and shapes, e.g., an orange triangle or a red square, so that you can’t confuse them. Also, when in-store pickers pick and scan the product, we ask them to scan the tray into which they’ve put it in order to confirm that they have chosen the right tray.
Your online business employs 20,000 people. Where do they work?
They mostly work in our stores -- either picking customers’ shopping or delivering it to them at home.
Why do you use your own delivery fleet of 2,000 trucks rather than the services of third-party logistics specialists?
In our grocery business we need a fairly specialised vehicle fleet which can cope with chilled, frozen and ambient products, and through using our own fleet, we can benefit from economies of scale.
For the non-food business we have two alternatives. Customers can choose whether they want to use a courier for delivery the next day or whether they want delivery by a Tesco.com van within a two-hour window the day after that.
But there are also food logistics operators who provide specialist services in the UK?
Food needs a very high trust level. Therefore, we wanted to have as much control as possible over the whole chain. Arguably, the only person an online grocery customer actually meets is their delivery driver. So, we like the idea of Tesco employees as ambassadors of our business.
What methods do you use to reduce delivery costs?
A lot! For example, we employ some very sophisticated software to optimise the way we route our fleet. We also have telematics equipment in our vans, software which enables you to monitor how efficiently a vehicle is being driven.. This helps us to optimise fuel efficiency.
How “green” is your delivery fleet?
Most vehicles are run on diesel. We are currently conducting experiments with around 20 electric vans. At the moment, the jury is still out as to whether this is a viable long-term alternative. We are also looking at gas and another new technology which looks more promising.
Diesel doesn’t seem very “green” however!
In point of fact, the carbon footprint of shopping online is lower than when customers shop at stores. Customers arrive individually in their cars whereas our vans can bundle orders and optimise routes.
Do you charge your online customers extra for delivery and are your online prices really the same as you charge in your stores?
We have always stressed that our prices for the actual products are the same on-line as in the store, and, yes, we do charge for delivery. We don’t like the idea of cross-subsidising parts of our business. As we know that delivery costs us something, we will charge customers for it.
Our average delivery charge is just under £5; our average basket size is around £100 including that delivery charge.
Do your delivery charges vary according to distance, and is there a rebate if certain order volumes are exceeded?
For grocery, the delivery charge varies by day of week and time of day to give customers choice and to allow us to manage utilisation efficiently -- without this variation we'd find our vans too busy on particular days e.g. Fridays and Saturdays, and less busy on a Tuesday.
We don't vary by distance nor do we offer free delivery for orders over certain thresholds.
For Direct, we offer customers plenty of choice from free collect in store, to £5 delivery to home at some stage during the day, to £6.99 for a specified 2 hour window. For larger items e.g. a sofa, we charge £19.95. In all these charges we are very confident of offering great value for money.
What do your online customers actually order in terms of deep frozen, fresh produce, dry good proportions? Are these the same as in the stores?
Yes -- they are in roughly the same proportions as the store, but on average an online shopper for grocery has a basket three times the size of an average store basket.
How intensively do your store customers use Tesco.com, and are you worried about cannibalisation of spend?
Roughly two-thirds of our online customers are existing Tesco store customers. We know from tracking the spending patterns of our Tesco Clubcard holders that the vast majority of their sales is incremental. So our online service does not cannibalise the existing business but increases its potential.
Tesco owns an extensive store portfolio. Is there a conflict of interests within Tesco between the clicks & mortar sides of the business?
I think this is one of the myths in the minds of some journalists! Clubcard enables us to see what individual customers actually buy. So we know that our best customers are those who shop both online and in-store and who appreciate the extra choice. We also know that most of their online spending is incremental. So we are in a very strong position.
How can you use your customer loyalty card to generate incremental online business with your existing customers?
We use the data from our Clubcard to talk to customers who are most likely to be interested in our online services. We talk to all our customers four times a year when we send them their Clubcard vouchers. In the accompanying letter we can target an offer to potentially relevant customers suggesting that they try our home shopping service. We can also write special letters to customers.
How do you market your online services to existing Tesco store customers?
We use a variety of means. We make sure that our online offer is very obvious in our stores because, obviously, a huge number of people walk through our stores everyday. In particular, we place leaflets dedicated to the home shopping service at the check-outs. We also advertise our Tesco.com services prominently on the exteriors of our delivery vans.
What type of customer uses Tesco.com most?
People have a slightly incorrect perception of who the typical internet customer really is. Most people think he or she will be rich and time-poor. In fact, with the exception of the least affluent 15 per cent, or so, our online customer base is broadly similar to that in our stores.
The only big difference is that we are over-represented in those customers with children. So, basically, two, or more, children are a very good indicator that you might appreciate our home shopping service.
Why do you think this is?
Presumably, because the business of going down to your local supermarket gets a whole lot more complicated when you’re lugging two small babies or children with you!
How do you market your online services to new customers?
We use a variety of means. We do a very limited amount of TV advertising; we have always used things like specialist trade press, e.g., magazines targeted at new mums. We also use some women’s magazines etc.
How do most of your online customers order with you? Can they use their iPhone?
We have a couple of iPhone applications, none of which will enable you to actually complete your shopping yet. However, they are coming very shortly!
Are there any typical customer order patterns?
Most people order today for tomorrow. They do their shopping the night before and get delivery the next day. Many people think that you have to be very disciplined and planned if you shop via the internet.
In fact, you don’t have to be when there are lots of convenient delivery slots the next day. All one has to do is sit down and place your order the night before.
Are there then no peak usage times?
We do see peaks at certain times of the day, for instance, in the early evening. However, customer traffic is steady throughout the day, so people are obviously also ordering at work. It always surprises me how many people are ordering at 2 a.m. in the morning!
In fact, one of the joys of internet shopping is that you can do so whenever you want to.
Do your customers have a choice as to how they order?
In our non-food Tesco Direct business, people can place their orders in three ways: on the internet; by phone to one of our call centre using the catalogue number to place their order; or with a member of staff at a special desk in around 260 of our stores. So, this part of the proposition is very multi-channel.
Roughly what percentage of the business is ordered in these three ways?
We don’t put this figure out in the public domain. However, the vast majority is ordered via the web and the other two methods are smaller, but about the same size.
What proportion of your online customers chooses to collect their orders from your stores rather than take delivery at home?
When it comes to items which can be physically delivered to a shop relatively easily, i.e., obviously not large furniture items, about 50 per cent. This is very interesting because they obviously feel that it is very convenient to combine collection with popping along to their local store.
As regards your 260-odd in-store desks for Tesco Direct, are you considering drive-ins?
Particularly in the grocery business, we’ve concentrated initially on taking the product to customers because they told us that this would spare them the hassle of shopping at their local supermarket. However, we are looking with interest at models such as the drive-thru.
Why separate Tesco.com, Tesco Direct and your new clothing (www.clothingattesco.com) and home electronics (www.tescoentertainment.com) offers on different sites? After all, a customer can buy everything together at your stores.
There is a very practical answer to this. One of the reasons why we have been successful online is our pragmatic approach. So, when we think up a new online idea we try to offer this to our customers as quickly as possible. In practice, it is often easier to create a separate website than to re-engineer our whole site.
Longer-term, however, we would certainly aspire to consolidating the non-food websites.
But doesn’t this run the risk of losing out on impulse purchases?
Admittedly, internet shopping is slightly different because store shopping gives the customer lots of opportunities to walk past merchandise and to buy on impulse.
Interestingly, the internet doesn’t really work like this. When people shop online, they tend to go on a specific shopping mission. If you want to get your grocery shopping done on the internet, you won’t necessarily appreciate being shown advertisements for a TV.
Don’t customers moan about the number of sites they have to remember?
We do all our marketing as Tesco.com so customers usually end up on our home page. From there, it’s pretty clear as to where to go.
What is your policy on returns?
We have a very customer-friendly policy on returns. As regards non-food products, such as television sets etc., you can either ask us to come and pick it up from you free-of-charge, or you can take it back to any store for a refund.
One of the critical things in online retailing is to make your website a very good reflection of what the products really are. So this means good photography as well as exact descriptions and information.
This is also in our own interest because it can make a very big difference to the amount that customers need to return. It also increases customer satisfaction because it’s always a hassle returning merchandise. Customers would much prefer to get it right first time.
Isn’t there a risk offering fashion? Surely, this is something which people need to touch and to try on?
The data suggests the contrary. Fashion is now the fastest-growing online sector in the market and it is already the second or third-largest online segment.
How much potential do you see in the UK online grocery market?
For many years, we have managed to achieve an annual growth rate of 25 per cent. Grocery online shopping still only constitutes less than 3 per cent of the overall grocery market in terms of sales. So, there are plenty more customers out there who will be interested in trying it.
Why do you think that the UK is much further than any other country in online shopping?
I think that this more to do with Tesco than the UK market in general.
You already have a small presence in South Korea and the Republic of Ireland; where else do you intend to roll out your online business?
Obviously, we will prioritise those 15 countries where we already do business with our physical stores. We will be extending our reach somewhere in Central Europe within the near future. The potential is vast.
Even in places like China, you’ll find that in certain areas, such as Shanghai, internet penetration and credit card usage is actually quite high.
Could you imagine starting a joint-venture in order to boost your international online business?
It wouldn’t be our preferred option.