Office Memo 2
Office Memo 2
17 September 2002


Here, unchanged but for the occasional annotation, is a 2,000-word article that Chris Ogg and I wrote in 1998. It is an examination of the relevance to the Internet of the business model of supermarkets, particularly those in Britain. The bulk of it has worn well, although digital cable is now in the hands of just two main suppliers nationally. Also, Asda has since been bought by WalMart, the USA's dominant supermarket chain.
The supermarket model
There are clues as to the intentions of portal owners in the behaviour of British supermarkets. The British food retailing market is dominated by a few companies. Between them, the five largest supermarkets now account for nearly 75% of Britain's purchases of groceries.
Such a market share implies enormous buying power. The supermarkets' suppliers, even the largest, are usually in a subordinate relationship to them. Anyone who has witnessed the parade of supplicants at the daily buyers' court at Marks & Spencer, for instance, will have seen naked power in action. Even in its present weakened condition, M & S's buying plans and pricing levels still determine the fate of many of its suppliers.
Some smaller suppliers are completely dependent on the chains. For instance, about 70% of the fruit and vegetables grown in Britain, often on small farms, go to the supermarkets. If the produce is not precisely to specification -- which is often above EU standards -- it is rejected. Since there are fewer high street greengrocers left, alternative outlets for it are hard to find and it is left to rot.
So powerful have the supermarkets become, and so similar are their prices, that last year [1997] the Director General of Fair Trading ordered an investigation into their profitability, which appears to be above international norms. That report is expected soon.
Also, there is a suggestion that the supermarkets act in concert to prevent access by cut-price foreign competitors. Certainly, they act fiercely on their own behalf to deny competitors access to towns they regard as their own.
The supermarkets point out that they are extremely efficient, more so than their European and American counterparts. Also, with justification, they can claim to have raised standards, introduced variety and helped educate the buying public. Their power to influence what appears on the British dinner table is frequently demonstrated by the take-up of new recipes or product ideas in their television advertisements.
They are certainly intensely competitive, with Tesco, Sainsbury's, Asda, Safeway and the other large chains rapidly adopting each other's innovations. Such competitiveness arises partly because the national grocery market is becoming saturated. This is not helped by the major companies' habit of building dozens of new stores every year, each with a planned life of only twenty years or so. As Marks and Spencer's chairman, Sir Richard Greenbury, picturesquely described it last year [1997], "We are entering a period of accelerated footage".
Governmental planning policy is turning against out-of-town superstores, so the retail giants are now moving back into the very high streets they helped eviscerate just a few years before. They are also setting up mini-shops in petrol stations, replacing the corner shops that they also helped put out of business.
In the meantime, the supermarkets try to emulate the experience of high street shopping within their vast halls. Among the attractions a large store might offer the shopper, therefore, are:
specialized ('boutique') counters for delicatessen goods, fresh meat and fresh fish
a 'bakery' (which, in reality, merely warms up part-baked loaves)
a fruit and vegetable section decked out to look like a greengrocers' shop
a flower shop
a newsagent's kiosk, offering fags, mags and rags (cigarettes, magazines and newspapers)
shelves of CDs and pre-recorded videos (supermarkets also now sell 15% of Britain's purchases of these)
a pharmacy, a post office, a dry cleaning shop and so on, operated as concessions
a coffee shop and cafeteria
cash machines.
Having filled his trolley and loaded his car, the shopper can top up with petrol at the supermarket's own pumps on his way out. The grocers now have 23% of the market for this. (Over 5,000 roadside filling stations have closed in the last 8 years, half of them in the last 2 or 3 years.)
And, if he has any money left, the shopper can even stop off at the do-it-yourself and gardening store, on the same site. Really, he says, who needs a high street? And who can blame him?
The supermarket chains are extending this eminently successful model, in several dimensions:
1. Most of them open earlier and close much later than traditional shops, including opening on Sundays. Over sixty of Tesco's stores are now open round the clock - from Monday morning to Saturday night - as well as for the maximum permitted six hours on Sunday
2. They all offer 'loyalty' cards, whereby the customer swaps personal and shopping-pattern information for discounts in cash or kind. (In other circumstances these would be called a bribes; they are little to do with true loyalty.) Sainsbury's alone has 11.5 million of its cards in circulation. Safeway is now selling the information from its cards, in aggregated form, to manufacturers
3. Many have either started their own bank or gone into partnership with an existing bank, offering credit ('store') cards and interest-earning accounts
4. Some, in collaboration with insurers, are offering house insurance, car insurance and pensions
5. Tesco is offering domestic gas supplies, in alliance with Norweb (itself once just an electricity supplier)
6. Safeway and Sainsbury's are running home shopping schemes for groceries. These let customers telephone in their orders to their nearest store, for personal collection later. Asda is operating a similar service directly from warehouses, in areas where has no stores.
7. Asda also plans to set up an on-line service for ''home entertainment'', offering books, videos, CDs and CD-ROMs from a range of over 1.2 million titles.
8. Tesco sells personal computers in its larger stores. It was even, it claimed at the time, the first British retailer to offer machines powered by the Pentium II microprocessor.
Taking all these activities and stratagems into account, it is clear that each of these vast organizations has, in effect, created its own adaptable, highly efficient and countrywide vending machine. While doing so, each has also established a strong brand identity (in everything but architectural style, which is uniformly banal and insipidly uniform). They have, in marketing jargon, successfully extended their brand franchises, increasing the domain, or range of products and sectors, over which their brand carries weight.
Clearly, this state of affairs keeps both customers and shareholders happy, despite the increasingly obvious cost in amenity, store variety and environmental impact.
How, therefore, does all this relate to World Wide Web portals? What are the clues we alluded to earlier? We think there are some important points of similarity:
1. Supermarkets and portals are both in the business of providing consumer access to the products of others. At the same time, they have an 'own brand' strategy that often creates potential conflicts with their suppliers and in the minds of customers.
2. They measure their success in terms of 'grabbing consumer eyeballs'.
3. Both are trying to extend their brand franchises into areas far removed from their apparent original missions. They are thus trying to extend and transfer customer loyalties into new product and service areas.
4. They have sophisticated electronic tools enabling them to collect individual and aggregated information, which then feeds back directly to issues such as inventory, layout, throughput and promotions.
They have several dependencies and vulnerabilities in common, too:
1. 'Real estate' is crucial to their strategies; being the first place that customers visit is essential to their success. Yet the rules governing real estate are established by others and by long-term trends over which neither supermarkets nor portals have little or no control. The real estate strategy is thus essentially reactive.
2. They are subject to 'herd instinct' shifts in public opinion and behaviour. They seek to guide these by huge marketing expenditures, yet cannot control them. Examples here for supermarkets are the move away from beef products or the class-based perceptions of, say, Sainsbury's versus Asda. Portals are likely to be at the mercy of public attitudes to data privacy and security.
3. Differentiation between rivals is based largely on intangibles and perceptions. These are not only expensive and difficult to communicate, they can be permanently negated by a single adverse experience. (Spreading 'the bad word' is, of course, easier on the Net and has become commonplace recently.)
4. Large as they may be, neither can stock everything; they can never succeed in fulfilling every need under one roof. Consumers will always be visiting their competitors.
5. Store layout, physical or virtual, must achieve customer ease of use and 'friendliness', yet be optimized for maximizing throughput and generating impulse purchases. Web sites are increasingly being assessed on these aspects by computer magazines and industry analysts.
6. Trying to provide everything for everyone while presenting just what the individual customer happens to want - quickly and in a clutter-free environment - are irreconcilable objectives.
7. They add little or no value to the products they display; these are readily available elsewhere.
Of course, each of these retail giants is ideally placed to become a portal itself. Tesco and Sainsbury's already offer Internet shopping, Tesco having also having become an internet service provider, through a deal with BT. Asda will be providing both home entertainment and grocery shopping over the Web, as well as its own shopping channel on digital television. Marks and Spencer has, at long last, announced that it has an ecommerce strategy, although few outside Baker Street seem to know what that is.
The supermarkets have a great advantage over 'new media' portal owners in that they are already known to the newcomer on the Net. Once mass online access is possible, through digital television and other means, their established brand franchises will take some dislodging.
Portal operators like Excite and Yahoo may dominate the world of the computer-accessed Web but the real mass market is not people sat in front of PC-driven browsers. According to a forecast from IDC, last year, there were just over 78 million devices used to gain access to the Web. By 2002, IDC says, that number will have grown to 515 million (an average annual growth rate of just under 27%).
Although some people do on-line shopping from work, this proportion will diminish (not least because employers will cut down on workplace joy-riding). At the moment, only 40% of the UK's 5.5 million Internet users log on from home. The supermarkets are not that interested in a share of a potential market of just over 2 million people, only half of whom shop over the Net (figures from Datamonitor.) They are after as many of Britain's shoppers as possible; they want that 5.5 million and more.
According to Oftel and ITC, 11 million homes in the UK - nearly half - were 'passed' by cable television by April 1998, with franchises out for three-quarters' coverage. When digital cable arrives, this year, it will create, with kiosks, mobile 'phones and Internet 'phones, the larger market the supermarkets want.
Cable & Wireless Communications has already announced digital cable deals with Barclays Bank, British Airways and Littlewoods Home Shopping. Its competitor, British Interactive Broadcasting, will be offering services to BSkyB's digital cable customers. BT, Midland Bank and Matsushita are among its other backers. ONdigital - the broadcast company jointly owned by Carlton Communications and Granada - has yet to reveal its ecommerce plans but has said it is willing to bear losses of £300 million before breaking even.
Consumer access does not look likely to be an issue, then. But branding is fundamentally important on the 'Net. People 'know' they're not going to fleeced by the likes of Marks and Spencer or Tesco. Nor will their trust be misplaced, because these companies, and many like them, have too much to lose by bilking the customer or by supplying sub-standard goods. Smaller or less well-known companies, especially American 'virtual' organizations, don't have a reputation to trade on. Your average British shopper will say to him or herself: "I like to know who I'm dealing with and what I'm buying, and I'd like there to be someone I can go to see if things go wrong."
Given their success at attracting that person to their stores, Britain's supermarkets stand a good chance of being [that shopper's] one-stop shop on the Internet.
Copyright 1998 & 2002, Christopher Ogg and Roger Whitehead
29 September 1998

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An Office Memo is an extended comment on what is happening in the world of the electronic business and elsewhere. Some memos will have appeared in Office Jotter; others are simply referred to in it.
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Copyright Roger Whitehead, 2002. I hereby assert and give notice of my right under section 77 of the Copyright, Designs and Patents Act 1998 to be identified as the author of these publications.