The Global Challenge to Reinvent the Last Mile in Retail: Insights From Sainsbury’s

Argos

ANITA BALCHANDANI, Partner, OC&C Strategy ConsultantsBERTRAND BODSON, Chief Digital and Marketing Officer, Sainsbury's Argos

Anita BalchandaniPartner,

Co-lead of the International Retail Practice

Reinventing the Last Mile for a Multichannel Consumer

3

ecommerce has outgrown stores >10x in most marketsRetail Market Growth by Channel, Top25 ecommerce Markets1, 2005-15CAGR %

Source: Canadean, OC&C analysis

-2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 160

5

10

75

70

30

25

20

15

Sweden

India

Austria

Netherlands

Canada

Spain

Russia

Store Growth

Italy

Australia

TurkeySouth Korea

France

Japan

Germany

UK

China

US

Mexico

Argentina

ecommerceGrowth

Denmark

Belgium

Norway

Finland

Poland

Brazil

Bubble Size Indicates Size of 2015 Online Retail

ecommerce Growth = Store Growth

2x

10x20x

1. Based on 2015 ecommerce value

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Up to a third of purchases made online by 2020

Majority of purchases researched online

Majority of retail will be multichannel enabled

Source: Canadean; Google Barometer; OC&C analysis

Online Consumer Activity1

% Total16%

20%

18%

17%

20%

26%

17%

20%

22%

15%

21%

20%

21%

Austria 75%

79%

Australia

USA

77%

79%

75%Netherlands 72%

85%

Germany

South Korea

Norway

China

68%

France

70%Finland

80%

92%Sweden

72%Denmark

UK 79%

1. Excluding ‘Food & Grocery’

Excluding Food & Grocery

Online Researched 2020eOnline Purchased 2020F

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Averages mask substantial category differences

7% 11% 12%21%

47%

7%

Health & Beauty

28%

62%

32%

Furniture & Floor Coverings

Food & Grocery Home & Garden Products

70%

79%

Apparel, Accessories, Luggage & Leather

Goods

Electrical & Electronics

65%

ecommerce Share by Category, 2015 vs 2020F% Total

Source: Canadean; Google Barometer; OC&C analysis

2015 Bought Online2015 Researched Online 

1. Data not available for Books, News and Stationary, Sports & Leisure Equipment or Music, Video & Entertainment Software

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Last mile deficiencies are holding back consumers

100%

10-15%

55% =Store as preferredchannel

c20%

10-15%

Current Online Penetration

1%

Grocery continues to see barriers to online1,2

% of Market

Limited slots Uncertainty on

attendance

Picking Substitutions Bad experience

Trust

Too expensive High threshold

on free delivery

Price Scheduling

45% = Delivery-related Reasons

1. Consumers were asked: “What are the main reason(s) that you have not purchased grocery items online in the last 6 months?”2. Sample: Aggregated Sample (UK, US, FR, DE, CN, JP); N = 1415Source: Euromonitor, OC&C Consumer Survey, OC&C analysis

25% in Japan

>20% in UK / US; <10% in China / France

6% in UK

45% in UK; 65% in France

7% in UK

UK, US, FR, DE, CN, JP

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Consumer Evolution

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Japan

78%

19%

2%

85%

12%

2%

USA

18%

29%

55%

32%

17%

68%

Markets are segmenting into three last mile end states

Germany UK FranceChina

Source: OC&C Consumer Survey, OC&C analysis

1. Consumers were asked: “Which of the following delivery methods have you used to receive online orders in the last 6 months?”2. Sample: UK = 543, USA = 523, FR = 506, DE = 553, CN = 502, JP = 5173. Most popular of Collection Points, Lockers, Click & Collect, Check & Reserve

Usage of Fulfilment Types1,2

% Respondents

5%

36%

80%

5%

40%

80%

Deliver or Collect

Home delivery winning

HomeDelivery

Collection3

Drive Thru

Two ways to shop Willing to drive

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Consumer service expectations continue to rise…Delivery Expectations1,2

% Respondents

1. Consumers were asked: “Which of the following delivery options would you expect to see offered ‘as standard’ across the majority of retailers (vs only offered by selected retailers)?” 2. Sample: UK = 543, USA = 523, FR = 506, DE = 553, CN = 502, JP = 517Source: OC&C Consumer Survey, OC&C analysis

23

57

21

53

1713

18

29

37

23

58

16

27

17

25

11

38

27

1317

34

58

33

45

21

42

InstantWithin 2 HoursSame DayNext Day Specific Time Slot

JapanChina

GermanyFrance

USUK

Outside of France, over a third of consumers expect Next Day

to be offered as standard

Same Day likely to be the next

market standard in many markets

USA and China are most demanding for speed

20-30% of consumers expect to be able to select

specific time slots for delivery

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10

2

5

4

6

-5

Next Day

Instant

Within 2 Hours

Same Day

3 – 5 Day

…and are particularly pronounced in younger generationsDelivery Expectations, by Age1

%pt Delta in Respondents (vs Market Average)

Expectation Higher Than Market

Expectation Lower Than Market

18-34 55+

1. Consumers were asked: “Which of the following delivery options would you expect to see offered ‘as standard’ across the majority of retailers (vs only offered by selected retailers)?” 2. Aggregated Sample; N = 931, 881 for 18-34, 55+ age brackets respectivelySource: OC&C Consumer Survey, OC&C analysis

Usage of Same Day Delivery Concepts, by Age% Respondents

0

5

10

15

20

18-34 34-55 55+

9

Within 2 hours -6

-5

-4

-5

Instant

3 – 5 Day

Same Day

Next Day

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Aside from same day, consumers willingness to pay is lowWillingness to Pay Varies Slightly by Country, But Shows Same Overall Trends% Respondents (Aggregated Sample - UK, US, FR, DE, CN, JP)

1. Consumers were asked: “Which of the following delivery options would you willing to pay for (vs expect to be free of charge)?” 2. Sample: UK = 543, USA = 523, FR = 506, DE = 553, CN = 502, JP = 517Source: OC&C Consumer Survey, OC&C analysis

18%

16%

24%

24%

32%

25%

13%

5%

Specific Time Slot

Sunday

Instant

Within 2 Hours

Same Day

Next Day

3 – 5 Day

2 Week In the US, 20% of consumers are willing to pay for 3-5 day delivery

UK consumers value same day more highly (40%), and German consumers

over twice as likely to pay

Predictability over speed – German consumers will pay for Sunday

delivery (25%), with time slots most popular in Japan (25%)

Next day valuation varies, with US most willing to pay (35%)

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Amazon Prime and Prime Now have taken off globally…

Source: OC&C Consumer Survey, OC&C analysis

1. Consumers were asked: “Which of the following delivery methods have you used to receive online orders in the last 6 months?”2. Sample: London = 223, New York = 252, Paris = 255, Berlin = 251, Beijing = 280, Tokyo = 276

Usage of Amazon Prime & PrimeNow1,2

% Respondents

25%

31%

37%

43%

43%

61%

Paris

Shanghai

Berlin

Tokyo

London

New York

11%

12%

23%

50%

Paris

Berlin

London

New York

n/a

n/a

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…and new last mile concepts are gaining traction

Source: OC&C Consumer Survey, OC&C analysis

1. Consumers were asked: “Which of the following delivery methods have you used to receive online orders in the last 6 months?”2. Sample: London = 223, New York = 252, Paris = 255, Berlin = 251, Beijing = 280, Tokyo = 276

Usage of New Delivery Concepts1,2

% Respondents

37%

63%

6%

24%

37%

12%

London New York BerlinParis Shanghai Tokyo

Food Delivery Convenient Parcel DeliveryGrocery Delivery

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Online barriers have disappeared

Stores will need to fight back on immediacy & convenience

3%

3%

3%

6%

11%

11%

12%

21%

22%

Offer In Store

Product Unavailable Online

Cost of Delivery

Prefer Dealing with People / Wanted Advice

Enjoy Shopping In Store

Needed Item Urgently

Impulse Purchase

Wanted to Test, Try & Compare

Convenience / Proximity of Store

1. Consumers were asked: “You said you bought the item in store, what were the main reasons for this?”2. Sample: UK, N = 341, excludes n<10Source: OC&C Consumer Survey, OC&C analysis

Primary Reason for Choosing In-Store% Respondents

Immediacy & convenience are key drivers for

physical channel

Stores not sufficiently differentiating on experience

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The Economic Challenge

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Higher fulfilment costs are challenging retail economics…

Source: OC&C Experience, OC&C analysis

Traditional Retailer

3-5%

Fulfilment Costs% Sales

11%

6%

0%

High Service, High Cost Market

High Service, Low Cost Market

Marketplace

TodayYesterday

Switch to online fulfilment expected to compress profit margins for multi-channel retailers by c.1.5 % points

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…accentuated by multiple points of profit leakageCustomer Order Economics and Points of LeakageExample Fashion Order

Source: OC&C Experience, OC&C analysis

Net Order Value2 Fashion

Items

$50

Gross Margin (GM)~ 50%Margin

$25

GM after Returns~ 40%

Return Rate

$15

GM After Cost to Serve

$<10

SmallBasket

Low MarginItems

High ReturnRate

Failed Deliveries, Inefficient Operations

Managing all points of leakage is essential to get order economics

right

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Ways to Win

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Winners will raise the bar on customer experience, while improving the economics

• Order before 22.00 for free next day delivery• 1 h delivery slot; on morning of delivery exact

arrival time +/- 10 min announced

Kakuyasu

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Over 600 pick up locations 15 min time slot for collection Orders through website or app

Direct to the boot of your car Delivered in 5mins from arrivalPicked in advance in-store

Leclerc leverages a dedicated format for 2-hour collection

5 min

1

4

2

5

3

6

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Picnic employs focused range and fixed delivery time slots

Fresh goods ordered overnight Technology speeds packing Order by 10pm deadline

…tracked in the Appat a time dictated by route plan…Delivery by electric van..

1

4

2

5

3

6

“Every day we come to your street but everyday there’s

only one delivery time” – Co-founder, Picnic

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Actions to consider

Make the last mile integral to your offer

Reimagine how you can raise the bar

for customers

Make more of stores

Back speed as the norm

Invest in predictive

analytics to reduce profit

leakage

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And finally…experiment your way…

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… and join forces to create common platforms

Retailer PartnershipsCommon Service for Retailer Use

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Acknowledgements

OC&C worked with Toluna Research to run a survey of 3000 respondents across 6 markets

For further information contact:

Anita BalchandaniPartner, OC&C Strategy Consultantsanita.balchandani@occstrategy.com

Hendrik WalterAssociate Partner, OC&C Strategy Consultantshendrik.walter@occstrategy.de

Miranda ParryConsultant, OC&C Strategy Consultantsmiranda.parry@occstrategy.com

The Argos Digital Transformation

Bertrand BodsonChief Digital & Marketing Officer, Sainsbury’s Argos

Argos has changed

Increased range

Transparent pricing

Higher service

standards

Role of physical

space

Legacy vs.TechCo

Specialists & pace

The online challenges to traditional retailers

Argos Strategy: Repositioning Argos as a digital retailer

Invested in fast growth of Argos channels

Repositioning our stores for a digital future

At Peak 2015 we launched Fast Track Delivery

• Same Day Delivery on 20,000 products for £3.95

• 4 slots a day (e.g. Order by 6pm, get it by 7-10pm), 7 days a week

• Live on 95% of UK postcodes, not just in big cities

• Delivered from our Hub stores, via our own friendly drivers

• Even on Christmas Eve, customers could order up to 1pm for 4pm delivery

• NPS: 80+

More universally appealing for customers and brands

Partnerships have helped us evolve our model

Sainsbury’s and Argos coming together (fast), and more innovation

Key for us to springboard our customers online

We have evolved Argos culture and the way we work

An army of 30,000 digital colleagues (now c.200,000)

Brought in and developed new skills and talent

Feels like a start-up inside

Customers first (end to end,

NPS)