Online retailing placing stress on logistics operations

19/Sep/2006

Internet retailing is exploding in terms of volume but the demands of building a logistics infrastructure are delaying the profitability of its largest operations. The UK is a case in point. Britain is by no means a leader in terms of broadband infrastructure. Nevertheless its internet retail operations grew by 6.3% in July and August according to the UK Government's Office for National Statistics.

As would be expected, catalogue retailers selling clothing and electrical goods have been amongst the prime beneficiaries of this trend towards web-based shopped. However there are clear signs that grocery retailing is catching-up. Food sales over the internet accounted for £1.86billion in 2005, just behind electronic/electrical items. Growth in the grocery sector, however, is much faster.

One of the largest online grocery operations in the UK has seen accelerating growth over the past year, but its continuing losses are preventing its floatation as a public company. Ocado, which is a joint venture between the UK supermarket Waitrose and a group of former Goldman Sachs bankers, lost £45million last year despite growing its sales to 50,000 deliveries a week. In great part the losses can be attributed to the construction of a network of fulfilment centres, with the company opening its first major facility. Despite using Waitrose products, it is not using the conventional retailer's logistics infrastructure. Rather Ocado is constructing a dedicated network of very large fulfilment centres and a fleet of small delivery trucks across Britain.

Recently Tesco's - the UK's largest retailer - extended its internet retailing business to beyond groceries, giving a major contract to TNT Logistics. Its logistics model at present differs from Ocado in that it utilises its existing infrastructure to a greater extent. However with volumes growing at the present levels such retailers will have to re-assess their logistics strategy.

With some estimates of internet retailing approaching 20% of total retail sales over the next decade the implications for the structure of retail logistics look too important to ignore.

Source: Transport Intelligence, September 19, 2006