Confessions Of Supply Chain Executives | What Has To Be True For E-Groceries To Be Profitable?

For years, grocery executives have been asking the same question in boardrooms across America and really across the world.

When will online grocery actually make us money?

The answer has been uncomfortable to date.

It hasn't.

It doesn't.

At least not yet.

Most grocers lose money on every single E commerce order they fulfill.

They've been subsidizing convenience with razor thin margins, hoping that scale will eventually solve the problem.

But here's what changed.

Last month, US E commerce grocery penetration hit 19%.

That is according to brick meets.

Click 90%.

That's not a rounding error anymore.

That's nearly one in five grocery purchases happening online.

And if you can't figure out how to make it profitable at 19%, what happens when it hits 25% or even 30%?

Today, we're going to answer not the $64,000 question, but the billion dollar question facing the grocery industry.

What needs to be true for grocers to actually make money on E Commerce?

Welcome to Confessions of a Supply Chain Executive, the podcast where we get brutally honest about the challenges, failures, and also where we can celebrate the victories in retail supply chains.

I am your host, Chris Walton.

Today's episode tackles the most pressing question in grocery retail profitability.

In E Commerce, we're not talking about growth metrics or customer acquisition.

We're talking about actual unit economics, making money on orders, not just fulfilling them.

My guest today is Richard McKenzie, the CEO of Volok, a division of the Roelik Group.

For those unfamiliar, Roelik operates one of Europe's most successful online grocery models and Valak is tasked with taking the lessons learned from their operations and to help other grocers achieve E Grocery profitability.

Richard brings a unique perspective from seeing what works in mature E grocery markets and understanding what American grocers need to check the Profitability Code.

Richard McKenzie, welcome to Confessions of Supply Chain Executives.

Thank you, Chris.

Good morning to you.

Yes, I'm excited to have you.

I mean, I think you bring a very unique perspective to to this conversation.

Why don't we get started too?

Why don't you explain your background and how you came to be a quote unquote grocery E commerce expert?

I'd say I started this journey.

I spent a decade in China and in China because everything went online and the grocers who were there just lost literally 120% of their profit to the likes of Alibaba, JD.com and so on.

And I just kind of started to look at it and say, okay, the west will be different, but the same thing's going to Happen.

And that's why I got interested in this.

And then I joined Ocado.

I was their chief commercial officer for four years, looking at their solutions business, looking after their partnerships.

And then that led me on to working with Roelik, where I kind of thought, actually, Rolik's got something pretty special from a customer point of view.

And what's the technology that underlies it?

So here I am.

What years were those that you were in China?

So I was in China 2010, 2019.

So it went from 0e commerce to I left Shanghai.

I reckon there was probably 40% of grocery online.

It was just total transformation.

Right, right.

And so, gosh, yes.

So 15, 16 years ago now, you started to see this and you had this epiphany that this was coming and that's it.

That 40% number is interesting too, because I want to start with the elephant in the room today for this discussion, US E Commerce grocery penetration.

As I said at the outset of this podcast, it hit 19% last month.

And it's approaching that.

What previously was the magic 20% threshold where E commerce starts to, for lack of a better way to put it, generally lay waste to retailers.

So from your perspective, working with grocers on both sides of the Atlantic, is this 19% milestone or is this 90% penetration?

I should say, is it a mile?

Is it a milestone tipping point that should start to worry traditional grocers?

Is it a validation that E Commerce grocery is essentially mainstream at this point,

for me, E commerce has been this kind of elephant in the room that grocers have wanted to ignore.

And I'm sure we're going to talk a lot about it, but it's less profitable.

It's difficult.

They don't know how to manage it and they've tried to ignore it.

We're just getting to this point now where it can't ignore it.

19% is a lot.

And if you're not doing it, that 19% is going to somebody else.

And I think it really, a lot of the managers said, okay, it was a Covid blip, we want this to go away.

But actually now it's just keeping on growing and you've got to take it seriously whether you like it or not.

So it's become this problem that I think can't be brushed under the carpet anymore.

Yeah, yeah, it's interesting.

I went on just fun anecdote.

I went on Amazon this week and I tried to order an air filter for my furnace.

And as I'm ordering the air filter, it popped up like literally 12 to 15 groceries in a tile format that it just wanted me to add to my order.

So it's definitely becoming more part of the consumer experience every day too, as those entrants come into play.

And the consumer expectations are going up and up with this and Amazon's driving that.

You know, this need to deliver now and this need to deliver in three hours, it's just getting more and more and I think that's what's driving this penetration.

Yeah.

And the survey that, you know, referenced at the outset, the 19% from Brick Meets Click.

Yeah, they said that, you know, the Amazon push into, you know, quick delivery of just the grocery items you need or maybe forgot is definitely having an impact on that number.

All right, so let's talk bluntly then about the unit economics.

When a typical U.S. grocer fulfills an online order, are they making money, losing money, breaking even?

And what's the typical loss or margin on an order in the US the

brutal truth is most people are losing money.

And the reason they're not investing in this, they've got themselves into this vicious cycle is they're losing money and therefore they don't invest in the proposition, therefore they don't get growth and therefore they lose money.

And I think that's kind of.

That's where most grocers are today.

How much?

You know, I think the good ones are kind of operating close towards break even.

I think honestly you're seeing kind of minus 5, minus $10 an order in places.

It's pretty.

It's pretty brutal.

Yeah, that's not good for anybody, you know, and everyone also has a different theory about why that is.

So break it down for us because you've got experience in China, you've experienced Okada, you now have experience at Valak and roll it group.

Where.

Where does the, where does the money actually disappear in.

In online grocery.

What are the biggest cost drivers that kill profitability or lead to that outcome that you just mentioned?

There's two obvious ones which everybody talks about, which is the cost of picking and packing the order.

And that's just typically that's not being done terribly efficiently.

And then there's the cost of the last mile, which typically kind of starts to fall apart.

If you're doing it out of a store and you've only got a handful of orders, you can't optimize that route very well.

And I think those are clearly the big ones.

I think the one people tend to forget though is the basket size.

If you're suddenly people aren't doing a full basket shop with you, if you're not getting $100 and you get what, $30amargin, suddenly you'll never pay for that.

Pick and pack and deliver.

So I think it's for me, picking, packing, delivering is really important.

But I do think we tend to forget about actually you just need to also make sure you're getting as big a basket size as possible in that.

How do you counter that?

I mean E Commerce doesn't seem built for that in a lot of ways.

This is, I think, where Rolex has done a really good job because Roelik has said we will deliver quickly but we will not compromise on range.

So we're doing typically 25,000 orders or 25,000 SKUs rather that we're offering in our markets or there or thereabouts.

And it's the widest.

But it's not just your fourth type of Tabasco sauce.

We're making sure there's fresh bakery.

We're making sure that you can do, you can want three apples picked for you and you've got that choice.

So what I say is we offer the full complexity of grocery to make sure that people can get everything they want on their order and therefore they're comfortable to make a full basket.

And I think that for me is important.

That makes sense too, because if I'm a regional or a local grocer, I almost have to do that.

Because if I don't do that, then it's going to be death by a thousand cuts.

Is like Amazon cherry picks, you know, orders with their air filters like I just talked about.

Exactly.

Let's make no mistake about it.

Amazon is offering a pretty full range now themselves.

Yeah.

And they're going to be thinking the same thing.

They're not just going for one banana.

Right, Right.

One banana.

Yes.

Well said.

That might be the quote of quote of today's podcast already.

All right, so, so let's, let's talk, let's talk about, let's go back to some of the issues then.

The picking problem.

So, you know, I've had a number of people on the show.

You know, eight years of doing this show, you know, in store picking seems very inefficient at the end of the day.

But then building dedicated micro fulfillment centers is also, you know, relatively capitally intensive and expensive.

So what's the right answer?

How do you know when you've reached the scale to justify dedicated infrastructure for in store picking?

There's a couple of points.

In store picking is probably, is very slow and actually Kind of, I think some of the US numbers, the stores are bigger, which makes it harder.

But actually some of the numbers you see in the US are really pretty slow.

And I think that does mean actually it's kind of the tipping point of when you would automate probably comes a little bit earlier and we're seeing business cases down to kind of 500 orders per day in terms of when it makes sense.

What I would also say though, it's not just a case of do I automate this one store now?

I think it does make sense to start to aggregate the volumes because if you kind of start to say actually I'm going to do 1,000 orders out of this store and automate it, you're suddenly going to end up with a much more efficient system and a store that actually knows the processes of how to do this.

Part of the problem, part of the reason we're running at 50 UPH or whatever it is in the pick rates and why they're so low is because the stores just don't have a lot of practice doing it.

I think that problem of lack of volume and lack of aggregation really hits.

Got it.

So said another way.

So you're saying take a look at the market, take a look at where you have the potential order density that you need and then put the infrastructure in, you think, and you put the infrastructure into the store to help with that.

Is that and, but I think it

depends, okay, in, in the US you've got big, you have a lot of big stores, you've got a lot of space.

I think actually there's, there is, you can create that room in the store to put in, put the MFC in.

MFCs are more difficult because you've got to work, you've got to work all of the store processes.

Actually typically in Europe, I'd actually say we tend to do it more out of the store.

But actually I think in some of the, in the case of the US MFCs are probably more relevant.

I want to touch on the Last Mile Part 2 a little bit more too.

So how does the last mile part come into this?

Because you know what I always hear from groceries too is like, you know, I've got the picking problem, I can't make my poise do it.

So I'm going to leverage the third party providers like Instacart and Doordash to come in and do it and then you know, they'll charge me what they're going to charge me for the last mile.

So, so how do you, how does the last mile factor into this equation?

You know, in your mind, typically the

last mile is the single biggest cost.

And actually it's kind of also the one we tend to ignore because we.

We can build shiny automated fulfillment centers.

We've yet to get the robot to drive the car, although autonomous vehicles will change these economics in the future.

It's one way that aggregation is a big deal, because if you're running a couple of cars out of a store that you'll just have no opportunity to optimize those routes.

If you're running 20 cars, you'll probably optimise 19 of them.

If you're running 50, you'll probably ought to optimize 49 of them.

And actually we've done some work, admittedly in Europe, where we were taking Storepic, moving it, centralizing it, and creating in this case, three hubs in a big city rather than 30 that they were doing it from.

And we were getting the last mile costs down by about 40%, not actually because we were doing anything different in terms of delivery times, but purely because we are aggregating the volumes and you can just optimize them better.

Even though on average the stem time, the drive time to the first order was a bit longer.

I think that kind of thing about last mile is just the more you fragment it, the more difficult it is to manage.

Got it.

So the load factor on the delivery cars going out is better, is what you're saying.

Exactly.

If you're running 20, you'll have 19 of them full.

If you're running two, you'll have one of them full.

Right, right.

That makes.

That makes a ton of sense.

All right, so there's been a lot of debate over the years, and I feel like.

I feel you and I have had this discussion too, you know, in passing as we've seen each other in person at different conferences and whatnot.

There's been a lot of debate about the right infrastructure to run online grocery profitably.

You've got.

You got.

And there's so many, like, different names for these things.

Like you got dark stores, you got MFCs micro fulfillment centers, which you already said.

You've got the spoken hub models, too.

You've got automated warehouses, you know, which could be a part of any of those we just mentioned.

So everyone's got a different answer.

You work with Valak on this and you know, a subsidiary of the Roll IT group.

What infrastructure model do you believe is the right one that actually drives profitability?

And why do you think that is?

I hate all the labels we tend to put on things of MFC, CFCs, whatever you call them.

To my mind the right answer is creating the right size FC for the demand you've got locally.

And there will be some cases where you can fulfill to a small city beautifully from One fc.

And actually we've got quite a lot of those where we've got a city of kind of 500,000, 1 million people, we've got one FC, it delivers, it can get anywhere in the city in a couple of hours and we just have a superb service.

I think when you've got volumes that are lower, it still makes sense.

And you've got big stores, it still makes sense to be going into doing MFCS Insider stores.

And I think that's.

And I do think that for retailers looking to use their existing infrastructure, that can make sense.

But what I think you've got to do though is not just to say we're going to put one in every store and keep all of, and do 200 orders out of every store because then you're just running a lot of inefficient processes both in the picking and the last mile.

So to my mind, the right message to get out there is it isn't, it's not a one size fits all, it's building the right size of fulfillment center for the demand you've got in that in the catchment area that you're trying to serve.

That makes sense.

Is there, is there a minimum like daily order threshold or volume that you need to at least hit to even be thinking about doing anything like you just described?

Yeah, I think so.

It's a built to do something that's really standalone, which is the most efficient.

I think you're talking about kind of the order of 3,000 orders a day.

If you can kind of get to that kind of volume, it makes sense.

Or if you think you're going to be in there in the next 12 months, it makes sense.

If you want to build something the side of a store, you can probably be making sense of 500 orders per day or above and I think you can.

Now clearly your level of efficiency you're getting down to at those is worse, but you can do it.

The difficulty frankly of those is the whole management layer of into getting the automation to work together with the in store processes because you've got to make sure that you're running the automation you're running, you're picking the tail of the product from the store.

They're both being brought together at the same time and you're not suddenly ending up with bottlenecks or choke points in that process.

Which is where a lot of the MFCs fell apart in the last few years and I think where a lot of people have been burnt.

Wow, that's so big.

Delta though, like you said, three, three thousand.

Right.

To five hundred.

That's the, that's.

Yeah, I think that's three thousand is standalone.

Yep.

Five hundred.

We inside a store.

Yeah.

Well, interesting.

And you.

But you can still get, you know, 30, 40% or your pick going through automation in those, in those, in those small facilities and you can still get that and they can be done efficiently.

As I say, the difficult bit is not actually the automation, it's making sure you can.

The store knows how to run the entire automatic or the guys in the store make sure you can run the entire thing.

Right.

That you can actually operate it to the efficiency that it's designed to.

And then that's absolutely what went wrong.

Some of the previous ideas on this I don't think were bad ideas, but operationally they just fell apart and the software that was provided with them was just not adequate.

Right, right.

Yeah.

And then we'll probably get.

I want to get into that more too, throughout this discussion too, especially as you talked about basket size being a key component of profitability as well.

I'm curious though, because the delivery expectation around speed also plays into this too.

Right.

It's not just how many orders am I taking a day, it's also how fast do I want the order as well and where can it come from that gives me the speed that my customer wants from me.

How does that factor into this?

Yeah.

And honestly, I think this is absolutely critical to growing your volumes.

And if you look at every, I think almost anywhere in the world, you look at who's winning, they are typically the people who are now delivering on time in full.

That's kind of the standard bit, but quicker.

And you look at where the growth is coming from in the US it's most definitely same day and getting quicker.

And actually I'd say if you look at what we've done in Rolik, we've been operating a three hour cutoff.

So you get an order three hours after you press click, press buy.

And we've been doing that through our cutoff for 10 years.

And that is honestly just from a customer point of view.

It's absolutely.

When customers are used to that, they'll never go back to saying, okay, I'll wait eight hours or I'll wait till next day.

That Convenience is absolutely essential to driving it.

And you've got to build the technology and the software and everything behind it to deliver that.

A lot of the software just doesn't do that.

Right, right.

And for the US Listeners, maybe, that are unfamiliar with Roelik, I should have done this at the outset too.

But just as a reminder, how big is the Roelic operation?

So we're about US$2 billion.

We operate in five countries.

In Europe, we operate out of 12 fulfillment centers.

So it gives you a rough idea of the scale of the fulfillment centers.

We are growing, know, year on year at 30, 40% at the moment.

You know, in Germany, our kind of, which is our biggest growth market, we're growing kind of 40 to 50%.

And the one thing I, the one plug I've got to give Rolex, the NPS numbers we get are outstanding.

You know, we are talking 90 plus NPS, which I just don't see anywhere else.

No, which, which is typical.

When you have a digital model that works that, that provides people that can, especially when it provides the con.

I was just hearing Uber's CEO talk about this on a podcast yesterday.

When you have a digital model that works, that provides the convenience at the right price, the general, like, love of that product is very, very high.

So that's, that's why you're seeing what you're seeing.

Right.

Customers love it.

And, you know, it's not a public number, but we spend a lot less on marketing to achieve that growth rate than a lot of other people are spending to get a much lower growth rate.

Yeah, right.

All right, so let's bring it back to us then.

So like, you know, the way, the best way I could describe the US Market is it's kind of like a hybrid approach.

Right now it seems like it's like it's got a lot of tentacles.

You've got some people placing orders from stores, some, some maybe doing dedicated facilities.

Many, many, many, many, many, as I've already said, are using third party services.

Is this like kind of hybrid approach where we're kind of just diversifying our bets, running a portfolio of options?

Is that, is that the right long term approach or do you think it's just a short term stopgap?

I'm guessing you think it's the latter based on how you've been approaching this conversation so far.

This is no longer an optional play.

Your 19% number that you opened with just tells you this is something you've got to make as a core part of your strategy.

You've got to Own your customers.

And if you're going to own your customers, you've got to offer them a really good proposition.

And you've got to be able to deliver it in a way that is a way that is economic.

And to my mind, that means you've actually, you've got to start to say, okay, how do I, how.

What do I have to do from a technology point of view to be able to deliver that?

In some cases it will be standalone fcs.

I think in many cases it's going to be starting to automate the size of the store.

But I think you've really got to, you've got to start owning that as a, as a retailer.

And if you're not, let's be honest, there's nothing that stops the third parties building their own fulfillment centers in the future and disaggregating you.

And let's be clear, Amazon are the ones who are winning in this market at the moment.

So where do you want your customers to go?

Yeah, and Amazon has said overtly that they're going to do that.

I mean, they've made announcements to that front.

Yeah, the way I'd use your banana analogy.

Yeah.

I mean, it seems like, it seems like at best it's a stopgap because you're going to end up the second banana if you don't start taking this approach in the long run.

All right, before we shift gears, I do want to ask you though, because one thing that's been absent from this discussion, I think it's particularly important in discussing the US market is the real estate angles to this location matters enormously for last mile economics.

How should grocers be thinking about, about the, the, the real estate utilization when it comes to designing and deciding where these automated facilities should go?

There is, I don't think there's a single single right answer to this.

You know, it's going to differ hugely depending on the size of the city, the level of demand you've got, the.

And the traffic profile you got in the city.

I think, yeah, what I would say is aggregating does bring benefits.

We talked about that, particularly with the last mile, but also in terms of the speed of the picking.

So I don't think you want to just be saying, we want to do a little bit out of every store I've got.

You do want to kind of start saying, we're going to aggregate, we're going to run automation at scale, we're going to run last mile at scale.

If you've got the volumes and you don't have that space in store.

I do believe kind of setting up fulfillment centers that are standalone makes a lot of sense.

And it's the model we've operated very successfully in Europe.

And then that's quite simple.

You start to say, if you take our older city, we started with one fulfillment center.

As our volumes grew, we just started ringing the city.

We now have three.

And it just means we can get to customers quicker and quicker and quicker.

But I do think, don't underestimate the value of actually bringing some of the volumes together so you can actually start to set up something that is efficient.

Which brings up another topic.

I remember you and I were talking about this a little bit at Grocery Shop at the end of last year too.

Because part of this too is like you've got grocers that are delivering from their own sites and controlling that delivery themselves.

And then you've got grocers that are on the third party marketplaces as well.

Where then those marketplaces are handling that.

You have to be thinking about all that volume in aggregate.

Right.

For this to work, like you don't want to set up a fulfillment center and then have all your volume running through Instacart or doordash.

I'm not picking on any of them.

But just like that's going to factor in and make your utilization a lot less efficient if you're not thinking about that and designing that as part of your strategy too.

Right, I agree.

And I think if you're a regional grocer in the US you don't want to be too dependent on the aggregators or the third parties.

But I do think there's no reason you can't be serving them as well out of these larger facilities.

I think that's the key for me is actually let's just start to set this up at a scale where you're efficient and then actually start to all of the volumes to that.

And if you're set up correctly, that's fine.

There's no reason you can't do that.

Yeah, right.

That's the key though.

You have to be thinking about that in advance.

Otherwise you're going to be running a distribution, you're going to be trying to do two things to accomplish the same thing with no, absolutely, absolutely no success.

All right, so to that point, so if people are listening and they're kind of buying into what you're throwing down here, which I definitely am so far.

So what, what are the operational metrics that matter most as people start to think about this?

Are there KPIs that grocers should be obsessing over to drive the most profitability that they can.

Yeah, I don't, I don't think this is too complicated.

Ultimately, what do you need?

You need a unit per hour or a cost per pick or whatever you do.

It all multiplies up to the same thing that's efficient.

I think the key thing actually in particular as you start to automate is actually there's the forgotten cost within that, as in the overhead.

So as you start to automate, you tend to forget about the management, the shift, the shift leads.

And so you can have a really fast pick right at the point of pick.

But actually all the stuff that goes on around the edges, you've got to watch.

And I think that's kind of again, one of the things that's fallen apart in the past is people kind of put in some super duper automation, but actually everything else just tends to fall apart as a mess around it.

So for me, from my point of view, and one of my big learnings in this industry is it's not just about the pick rate of how fast you can get something in a bag, it's about everything else that goes on.

And as we get faster and faster robotics, there's more of that is the case.

Right.

You still got to manage it.

That's what I hear you saying, you

still got to manage it.

And frankly that often gets called other in the P and L just is actually becoming the biggest line.

And actually that's what you could because you can also, and particularly now you've got robotic pick coming into these centers.

Actually a lot of the actual manual labor is getting really quite efficient.

I think the second thing is drop density.

And I think that is probably the one thing that probably people forget about most.

And I think it is one of the things actually we've put a lot of effort into and have actually made most progress over the last 18 months, really trying to understand how to make that work.

And it works differently in different markets, just depending on the labor model you're using.

And then I think the third thing is basket size, which I keep coming back to.

You've got to make sure you've got a big enough basket that there's enough margin you can afford to provide this service to the customer.

And ultimately that means you've got to be offering a wide enough range and people trust you on the fresh products and the handling of the products and that it's all going to turn up with your eggs not broken.

Is there A basket size number that tells you like, yeah, you've got a good healthy kind of starting point here to go in this direction.

I always have a rule of thumb of $100 just because I think if you've got $100, you've got kind of $30amargin and then you can do, you know, if you've got it gives you as a target, $10 to do your pick, $10 to do your delivery, and you've got some money left over to pay for everything else.

But that's important to think about too because like the merchandising strategy then of how you get to the basket is also fundamentally important to make E Commerce grocery profitable too, to get the automation to work harder for you in the background.

So, yeah, how do you think, how do you think about, like, what are there merchandising tips or tricks you've seen that work well to get that basket size, you know, staying consistently at the level you need it to be?

I think so.

You know, clearly there's some tactical things in terms of types of promotions you drive, you know, you don't want to, you want to drive, you want to drive multiplies because you, you don't want to drive just money off.

So there's a kind of, there's some pretty tactical parts around that.

There's a good old tactic of when do you do free delivery thresholds or when does the delivery become cheaper to drive that, which is classic.

I also think, and this is clearly a bit of a strategic question, but if you have automation, the incremental cost of adding a new SKU is lower.

Now you get no value from adding your fourth tomato ketchup in there.

But if you can start to put genuinely exclusive product in.

And if you think that if you're serving an entire city, there's things that make sense to range for an entire city that might not make sense to range for a store.

So classically expat communities.

I remember a good example.

If you've got a French community, it may not be worth putting that French product in any one store.

But I've seen some great examples where you put that in a fulfillment center and it flies because it's the only place you can buy that product that you really want.

So I think there are some few things there that you can do within that.

And I think frankly, it's one of the things which offline grocers have not been terribly good at because they think about stores and how to range for a store, not about things that think about that work for an entire city.

Yeah, preach it, man.

You are, you are speaking to my choir on that one.

Because I have long been on my soapbox about how digital is the key to unlocking localization.

I hear all the time talking about we're going to make our assortment more localized.

I'm like, no you're not.

You can only put so many products on your shelf.

Digitalization is the key to making that happen.

Invest there because then you get all these ancillary benefits that we've just talked.

Interestingly, one of the things we do in Europe is we source a lot from farms that are local to the fulfillment center, which again makes no sense if you're kind of, if you're trying to get those go from the farm to every, to every shop you've got in wherever.

But because you've got farms that are local to it and then that can just be distributed to all of Munich pretty efficiently, we can actually, we probably have more local products than does the standard grocery store.

Right?

Yeah.

No, that's a great point.

For those listening, especially those in the US that play into that market.

I can think of retailers particularly substitutions.

Substitutions and out of stocks like those.

You know, those always seem like the big things that we hear about as the pain points for E commerce grocery.

How should they be thinking about managing the trade offs around those?

The beautiful thing about moving into automation is you control almost 100% of your stock.

If you, if you got, if you've got product on a shelf, you're competing with your customer.

Even if the system says it's there, the customer might have picked it up and put it in the next aisle.

The more you can move into a controlled environment.

So, and I think you do need to have the supply chain segregated so the product's coming in separately because you don't want to go onto a shelf.

And then also somebody or somebody at the back of store trying to manually split the product.

But if you can do that, you know exactly what goes into it, you know exactly what comes out of it.

You end up with very, very low out of stock and very low substitutions.

The worst you get frankly is when a supplier lets you down in terms of the product not arriving.

But even then you know it's happening.

You actually know about it and it's not by surprise.

And when you then are doing same day delivery, you're not really worried about did the supplier turn up?

Because actually typically the supplier did or didn't turn up in the morning, therefore the product is or isn't available for delivery in three hours time.

So if you can get this right, actually in our experience, you can drive that problem down to being very, very low.

Yeah.

And that actually just happened to me where I got a cancellation on order same day from a store pick.

I won't name the retailer, but yeah, it was very, very frustrating.

And it's not theory, it's proven because warehouses run at inventory accuracy than stores do for all the reasons you just described.

Yeah.

And we've got, we have 99.5% availability.

It is doable.

I know this is not rocket science.

This is not because we're geniuses.

It is because it is just easier doing it like this when you've got segregated inventory.

Right, right.

100%.

So that's how you have to.

Segregated inventory is a key piece of this too, which we kind of dance around, you know, probably 10 or 15 minutes ago.

But that's good to call out now as a piece of this.

All right, so last question on this topic before we move on.

I'm, you know, slot management and customer behavior shaping.

Like, I feel like in the, particularly overseas, there's more, there's more attempts or more success at potentially doing both of those things.

Can you actually influence when customers want their grocery, do their groceries delivered to them too?

And, and if so, does that actually move the profitability needle as well?

Richard, like, is that something that the US Grocer should be thinking about or should they just be like, no, we just got to get the same day?

Like, how do you think about that?

I think, I think you end up, this is, you end up with quite heated debates on this topic.

Okay.

You know, at Roelic, we offer basically an unconstrained customer offer.

So we are, we are basically making sure that you will almost always be able to find a slot in the next few hours when you place your order.

And that for us is an article of faith that we just say we want to be offering our customers that high degree of availability because we don't want them ever to go elsewhere.

And that's one of the reasons we've grown our business so successfully is because we just offer that level of convenience.

You absolutely can start managing slots and you absolutely, you know, there's lots of examples of people out there who will price differently to drive people away from, away from a Saturday order and to make sure that you are filling up the Wednesday afternoon orders.

And I think that absolutely can work and you absolutely can do that.

I'd say it's actually kind of one of the Things that I see has gone wrong quite a lot in e grocery is because what you haven't done is the guys who are doing that don't always talk to the supply chain teams, don't always talk to the merchants.

So you end up with enormous peaks coming at a time when the supply chain team is running the FC or the store pick doesn't know it's coming.

Let's be candid.

If in a store you get 20% more customers than you expect, you have a few queues, but it's kind of manageable if you suddenly end up with that, you just max out and there's just a.

There's a.

You can't push the picking any faster so that the system does break unless you manage that.

Which goes back to idea.

We're just talking about like the idea here is segregating the inventory, leaving the store inventory for those that are coming into the store to purchase.

Segregating everything out to give you still the flexibility to demand shape if you want.

If that's part of your business model, you can.

But it'll make it more efficient too.

Exactly.

And I think this is the whole theme.

When you start talk about how you think about kind of setting up your E comm, you've got to actually make sure that you are being joined up because actually the system is less forgiving when you aren't joined up, I think than stores are.

All right, so let's shift gears a little bit now.

So there are ways to monetize E commerce beyond just the selling of groceries too.

And specifically I think about membership models.

So I'm going to put you on the spot a little bit with this question.

So you've got things like, you know, for everyone knows them but Walmart plus Amazon prime, they essentially are helping, you know, with the profitability question because customers are prepaying for the convenience that the retailers provide them with these membership programs.

So let me ask you, should every retailer have a membership program?

I kind of think the answer is yes.

I'm honest, I'm honestly a big fan of them.

And I think there's a one is just the response.

And I've seen this in a few places, including Roelic.

The response you get in terms of frequency of shop and loyalty is just huge.

The Pareto curve we see of just people who you end up with driving people from being marginal customers to being loyal customers because they've already paid for their deliveries in their mind and therefore that extra delivery is free.

And I think the second point is really interesting though.

Because as soon as you start to kind of own a customer much more, you can understand their behavior.

And guess what, in terms of selling advertising, that advertising becomes a lot more valuable.

So suddenly you are no longer just a box shifter.

You've actually become the person who understands the customer behavior.

And when you're talking to Procter and Gamble, that becomes a really valuable asset you've got.

Yeah, well, that's funny.

I was going to ask you next.

I mean, at what scale does, does that retail media play then particularly become important when you start talking about E commerce profitability?

I don't know the answer, how low you can go.

I would say we roe link operate in a pretty challenging way as in we have five different countries for our 2 billion of sales and we do a good retail media business in each of those because we understand the customer behavior.

Now clearly there are some benefits of scale, but I think it is not the case that you can't do this when you're at 300 million.

Actually, I think you can because I think that ability to understand and really offer advertising to a customer at critical points in a customer's decision making process I think is super valuable.

How too does private label play into this, Richard?

You know, it's part of the, it's part of the merchandising question.

It's part of the, it is part of the margin question.

I'm a big fan of private label, but then again, I was brought up in UK grocery, which kind of, kind of, kind of pioneered a lot of this.

You know, we no longer see it as the cheap substitute.

So I'm a big fan of it.

I think, you know, you require scale to deliver it.

It takes time to develop it.

But if you can get it right, it's a big margin driver and also can then become a loyalty driver as well because you own those products nobody else can.

Right, yeah.

It kind of plays back in what you're saying, like why you're kind of a big proponent of membership models too, because you get to know the customer, you can then serve up the items to the customer that you want and then get the retail media dollars.

But also you can serve them up the items that are uniquely yours, which is also an important factor on why they choose to shop with you.

Absolutely.

Right.

If you love that brand of noodles or that you're not going to change or it's a real friction point for you trying to change.

Right, right.

Okay, so we've covered bananas, we've covered noodles.

Yeah, right, right.

I think I do, yeah.

Very Very high in starch.

All right, all right.

So let's rewind a little bit.

So you know, just to give a lay the landscape for everyone listening.

That's still with us.

So we've covered the, we've covered the general costs that are involved here.

We've covered some of the infrastructural questions, we've covered some of the operational dynamics that go into thinking about this question.

We've also covered the E commerce side from the revenue generating side because it's not all about eliminating costs, it's not all about efficiency.

There are revenue gains that can be made here too, which we just touched on.

So now I want to talk about the organizational side of the E commerce question of profitability because like you, you actually mentioned it already to a degree.

But let's go deeper into it.

Like you know, organizational, you know, organizational dysfunction, for lack of a better word, can have an impact on this.

And I've seen this happen at retailers, particularly over, you know, my almost 30 year career.

So what are the organizational barriers that you think prevent grocers from building profitable E commerce operations?

I think that I've seen, like you, I've seen this happen many times and it's almost quite sad.

There's one example I can think of where the marketing was not owned by the E commerce business and they'd have this difficult conversation saying the marketing team would say, oh, but you're less profitable than the stores so we're not going to give you any marketing budget.

Guess what, they never grew.

And then as a result you ended up in this vicious circle which you couldn't start to become efficient because you weren't growing.

So in my mind, you need to set this up as, as a business in its own right.

Oh, interesting.

Okay.

And I think, you know, you do, I do think you need to say, you know, the commercial teams, the people who run the fulfillment need to be thinking, need to be thinking in a joined up way.

And it's the earlier example, you know, if you suddenly dump in unpredictable third party orders but the supply chain team or the team is running the fulfillment centers or the running the fulfillment in the last mile, don't know about it, you've just got no hope.

Or they will just staff it up to the entire day as if the entire day to that peak and you end up, yes, maxing out at some points but then running at 20% utilization for the other times.

So you do need to think about, everybody needs to think about the demand and the customer profile in the same way so to me, that is absolutely bloody critical.

Wow, okay, so you just hit me over the head with a hammer on that one.

Actually, that was not something I expected to hear or to talk about.

And it quite frankly flies in the face of how, at least, particularly in the US Most people are organizing themselves because they're organizing themselves around the omnichannel idea.

But as I heard you talk about it, I'm kind of like, yeah, if you're really.

And I think this may be unique to groceries.

So I'm curious about your perspective on that.

When I hear you talk, I'm like, yeah, grocery, though, grocery is a different beast.

You probably do need to separate this out as a standalone operating model.

And Chris, I'm a big fan of Omnichannel, but I think what we've also got to say is, what does that mean?

I think the customer needs to be owned centrally.

So talk about loyalty.

Loyalty needs to be owned centrally.

There's no.

That's possibly if you're just doing it in one channel.

So the ability to kind of offer customers incentives across the channels, central ownership of data, central ownership of suppliers, buying central.

But you still need commercial teams because we talked about earlier that you might want to change the ranges.

You certainly want to change some of the promotional.

On my view, there's a good opportunity to change some of the promotions, the marketing you need to be thinking about in a joint because otherwise you're just going to end up with demand that the guys in the fulfillment central, the stores can't fulfill.

So you do need that kind of vertical from commercial marketing operations that I think all sits in this kind of ecom vertical.

Yeah.

And then the other part is the incentives too, right?

Like, actually, as you're talking, I think you're right.

This is what you have to do.

But you also got to think about the incentives on the store side because like, the one complaint I always hear is, you know, this.

The digital stealing my sales in my store.

You put this new fulfillment center in and like, now I'm not selling anything.

You've got to think about that.

I totally agree.

And I think you can't.

You've got to make sure whatever the store is incentivized on, whatever KPIs the store manager gets, he is not hurt by having.

If you're doing E Comm sales out of his store, he's not hurt by that.

And even frankly, if you choose to, if his customers are doing E comm, he probably should get some credit because you probably do want to be advertising both Channels in both.

Is this an organizational structure that is unique to grocery?

Like, I kind of think it might be.

I think it might be.

And I think they kind of test the volume.

The challenges of fulfilling grocery are kind of unique.

Yeah.

The margin structures are different too.

Margin structure is different and, you know, just.

It is a much more difficult thing to fulfill.

Well, than is apparel.

Yeah.

So I think.

I think it probably is.

I think it probably is unique.

I've not spent a lot of time thinking about it, but yeah, I think it probably is.

That's a really great.

Wow.

God, this is a. I might have to write an article about this.

Richard, when I get off the.

Get off this podcast.

Yeah.

Do I get a reference?

I think you're going to.

Yes, 100%, you are, because you just, you flipped a script in terms of how I've ever thought about this and I imagine how a lot of our listeners have thought about it too.

All right, so let's start wrapping it up here.

So if a grocer comes to you tomorrow and says, like, let's give an example, a theoretical we're at 15% E commerce penetration, we're losing money on every order.

What should we do?

What's your answer to them?

Yeah, you need to understand what the hell's going on.

If you're a 15%, you shouldn't be losing.

If you're a decent sized grocer of 15%, you should be getting towards making money.

So what is it your basket size?

Is it your fulfillment cost?

Is it your last mile?

But I think ultimately you need to be setting it up so that you've got a customer proposition that customers will shop a full basket and that we're fulfilling their needs.

You can pick it efficiently and you can deliver it efficiently.

And both of those have answers around aggregation and also automation.

Are there grocers in the.

I mean, I know you'd say Roelic too, but like, are there grocers outside of Roelic in the US or Europe or anywhere in the world really, that you think are getting this right and that people should study?

Where do I go?

I'd say there are some interesting models out there.

I've always got a little bit of a soft spot for Picnic in the Netherlands, which is a milk crown model.

Super efficient, very different model.

We actually compete with it at times, but it's milk crowned.

And actually to my mind, it's a little bit like what Aldi offers.

It's a very cheap way of getting a narrow range of goods to customers.

To customers.

Doors and Actually, I think that's kind of interesting.

I also think going back to some of my roots, what you see in China, and some of the kind of, some of the immediacy, some of the kind of fresh that you're getting delivered in China, some of the merging of food service and grocery that you get in the Chinese operations is really interesting.

You can now kind of get your lobster cooked, put into a, put into a meal, and delivered with your bananas.

And that's kind of interesting.

Or you can order the lobster fresh.

And that kind of, that's kind of interesting as well, because margins in food service are higher than in grocery.

So if you can crack that, that's kind of an interesting option.

That's kind of interesting as well.

Okay, well, great job bringing protein into this discussion.

Finally.

Not so starchy after all the podcast.

Right?

Right.

All right, so my, my final two questions for you are on the confessions angle, which is why we call this podcast Confessions of Supply Chain Executives.

So my first confession question for you is, what is, is there an uncomfortable truth about grocery e commerce that most grocers still just don't want to hear?

I think E commerce.

So people talk about E commerce being unprofitable, but actually, sometimes E commerce is hiding the unprofitability of stores.

And if you take the volume out of the store, you're left with a store problem.

And actually, some people are kind of misdiagnosing it as an E commerce problem.

Actually, the problem is actually when you take the volumes out, you're left with some stores, and that's awkward and people don't want to admit to that.

I'd say the second one is this is a major strategic problem for these guys, but the returns often go beyond the incentive programs of the management.

And you've got to have somebody who's buckling up to say, I'm okay, that this is going to really be something that's driving my business in five years, not necessarily in one year.

And that's a challenge when chief executives last an average of what, three to

five years, which actually should, in theory be easier for the regional grocers to actually know, get their heads around because they tend to stay in position longer.

Exactly.

I think this, this should be something that suits family businesses down to the ground.

Right.

Sam interviewing you again.

In, say, three to five years time, is E grocery going to be profitable for most players?

Are we still going to be having this conversation and say, you know, 2029, 2030, 2031?

Like, what's your take, Richard?

What do we know going to be bigger.

This is definitely a one way street.

I have a feeling what you're going to get to is a haves and have nots and you're going to end up with a bunch of people who've invested, worked out how to get a model that they own and they own their customers who are going to be on a pretty strong trajectory.

And you've got a bunch of people who have chosen to stick their heads in the sand and they're going to be the ones who struggle.

And that for them, I just don't see how they're going to reach a point where they're profitable.

And if they're working with some of the third parties, frankly, the third parties are going to get more and more power over them.

And I think the pie is going to go more and more to the third parties, which actually kind of goes back to what I said in China.

You end up giving all your profit away.

Yeah.

And the retail media angle too, because they get a lot of first party data in terms of making their customers continue to use their platforms too.

That's a really interesting point.

Point.

Correct.

Oh, man.

Richard, I wish I could talk to you for longer, but unfortunately we gotta end it at some point.

So.

Richard McKenzie of Vlock, a division of the Roller Group, thank you for bringing what is, what has just been an outstanding level of clarity to one of retail's toughest challenges.

Thank you, Chris.

I, as always, I love being here.

So I'd love to do this chat again in 2028 or whenever you mentioned.

Yeah, right.

I'll book you right now if, hey, if people want to get in touch with you, they're listening to this conversation.

What's the best way for them to do that?

Richard, my email is richard.mckenziemck verloc.com and our website is www.verlocdeck.com.

so love to hear from anybody.

All right, well, there you have it.

And of course, today's podcast has been produced with the help and support of Ella Seward.

I am Chris Walton and this has been confessions of supply chain executives.

Never forget, Omnitok fans.

Confessions are almost always good for the soul.

Be careful out there.