Are stores an asset in online grocery?

Siobhan Gehin probed Munthe-Kaas as to why established incumbents in Norway haven’t adopted the same distribution model for online, if it is so demonstrably effective. “How come it takes a startup to … bring this kind of new thinking on the value chain to the market?” she asked.

“Fundamentally, there isn’t really a reason – I think if you’re an established retailer, you can do what we have done,” Munthe-Kaas replied. “You just have to be very mindful of then creating a culture in that spin-off [business] that can work unencumbered. We have achieved these results because we have not made compromises – we have adapted our offering to what gives us an optimal value chain, and by extension, we have been able to be great on price, and that has clearly driven our market share.”

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In Munthe-Kaas’ view, grocery retailers don’t benefit from trying to combine online with offline – at least when pure online profitability is taken as a success metric. “If I owned the biggest offline retailer in Norway, and Oda, I would keep them entirely separate,” he said.

For omnichannel retailers, the store estate is generally seen as an asset to online profitability in allowing them to offer click-and-collect, which yields significantly better margins than home delivery: calculations by Bain & Co., published in 2020, put the profit margins for click-and-collect orders at -5 to 2%, depending on the fulfilment method, whereas home delivery fared much worse at -15 to -2%. Stores can also have greater proximity to consumers than massive, centralised warehouses due to their smaller footprint, thereby shrinking the last mile when they are used to pick and pack orders and enabling innovations like q-commerce.

When it comes to click-and-collect, however, Munthe-Kaas believes that “people would prefer home delivery – especially when you do it this efficiently … The difference in cost between pickup and home delivery [then] starts to become pretty small.” As for using stores to pick and pack orders, “you can do it in small areas and pockets and so on, but to really drive big volumes, there’s so much to gain from doing a separate value chain.”

Arguably, automated micro-fulfilment centres (MFCs) are the exception to this rule, as they promise the best of both worlds: an MFC can be housed inside an existing store or in a smaller warehouse in an urban location, putting them closer to the consumer, while still enabling the cost savings that come with automation. This would also unlock the potential for an online pureplay like Oda to offer rapid delivery; Ocado, for example, is investing in MFCs to support its one-hour “Zoom” service, pledging to add to its two existing London sites in Acton and Canning Town.

With that said, there are also difficulties inherent in shrinking automation technology down to fit in an MFC; Ocado has admitted that its smallest MFC in west London is only “part automated”, and it is still working on developing a robotic platform that can operate in smaller spaces.