Battle of the e-grocers

Gareth Cosslett explains how Tesco.com is battling to be your first port of call when you want to fill up your e-trolley

Gareth Cosslett explains how Tesco.com is battling to be your first port of call when you want to fill up your e-trolley

John Browett could be ranked alongside the giant panda or the black rhino as an endangered species. He is a member of one of the tiniest sub-sects of the e-commerce world: the rare genus known as e-profit makers.

And the former Cambridge zoology student has as good a case as any to be billed as the king of the jungle. As chief executive of Tesco.com, he is heading up one of Europe's largest online retailers and the biggest e-grocer in the world.

Just 18 months after a full roll-out into 240 Tesco stores in the UK, the grocery business is already making a profit. No embarrassed finger-jabbing at sales projections, no demographic justification for current loss-making strategies, Tesco's Internet shopping and home delivery service is already in the black on the grocery side.

The constant addition of new product categories such as electrical goods, financial services, mother and baby goods, clothes and home entertainment - plus the losses from the mail order business and overseas expansion - mean that the overall Tesco.com business is still making a loss. But Browett says it is just a matter of time before his business produces positive returns.

"The reason we report losses is that we put in all the start-up losses for all the other e-commerce initiatives that we have. But the grocery business is profitable. It is not the same as store profitability, but it has only been fully going for 18 months. Our objective for that business - and we expect to achieve it fairly straightforwardly - is to have profit margins that are the same as, if not higher than, the stores," he says.

The relationship with stores has always been a thorny one for online food retailers. The fear that e-commerce will cannibalise sales from bricks-and-mortar outlets has held back development for many retailers. Tesco took a gamble in launching into e-commerce and, Browett says, it paid off.

"Half our sales on the Internet are new to Tesco, so half are cannibalised. That is a really exceptional performance. It means that I can build a new business while keeping existing customers happy.

"We always knew that this was a device to increase market share. It is a new service, it adds value to customers and enables us to access customers we could not otherwise get to. We think there is a very big advantage to being first in this."

The size of his business and its rate of growth is sending shock waves through Tesco's traditional competitors such as Sainsbury's, Safeway and Asda, which have all proved reluctant to roll out a full service before working out how to turn a profit.

Tesco's online service is handling 60,000 orders per week, producing a turnover of more than £5m per week in groceries alone, and has 750,000 registered users in the UK. The grocery service covers 90% of the UK population and the average spend per order is £85. The business has doubled in size in the last six months and Browett is confident that the Tesco.com steamroller will power forward.

"We have capacity within our system to do up to £2bn worth of turnover. That is based on the capacity within our stores and what we currently know, but there is no reason why it should not go beyond that.

"It has surprised everybody that there is £250m worth of business to be done in grocery home shopping. If it doubled every year for the next five years then we could handle it, but faster growth than that would be difficult."

There is also huge scope for overseas development. In markets where Tesco already has stores, the UK business model is being adopted: Tesco.com launched in Ireland last month and is hitting South Korea next year, with Taiwan also pencilled in for the future.

In countries where it has no presence, Tesco is looking to set up joint ventures with other retailers to combine their store portfolio with Tesco's e-commerce business model. Its first priority market is an audacious coals-to-Newcastle play: "We're focusing on North America at the moment. We're going through the list and have got some promising leads," says Browett.

His level-headed approach is the result of a textbook business upbringing: Cambridge student; five years cutting his teeth in the City; excelled at the best MBA in the US; think-tank role at the Boston Consulting Group; groomed for the top at Tesco - arguably the UK's best-run company in arguably the UK's most cut-throat business environment.

Here is a man not adverse to dipping into a business manual or two.

"In our business model we have created a classic 'strategy versus tactics' environment. We set a strategy for our development team and all they do is think about how to actually make the business better, simpler and cheaper.

"Tesco.com has its own board and is run as a separate business, but it obviously taps into the advantages that the mainstream Tesco business has, such as the power of the brand, the chance to use our stores to promote the service - half of all UK households come through our doors every 12 weeks - and the buying power and contacts that Tesco has.

"We are running a real business, so our day-to-day problems are in managing the cost lines properly and improving the quality of the service. We worked on the economic model for three years before we launched in December 1996. We were not ready for a full roll-out until 1999, so it has taken us a long time to work out how to make it robust and profitable."

Browett is proud of the fact that existing Tesco staff have largely been behind its success - a team of just six people was working on the project when the first Internet order was taken four years ago. A total of 70 people now work on the business.

"We have developed a lot of people internally. We have not spent a lot of time going out into the market to get whizzkids. The reason for that is two-fold. One is that the Tesco people are good and they know the business well. The other is that it is not actually that complicated when you get down to the fundamentals.

"The mistake that lots of people make with Internet businesses is that they say they are IT businesses when in fact they are not. A lot of the Internet start-ups have failed because they were not run by people who actually knew what the underlying business process was going to look like. The IT is only a facilitator; it is not an end in itself.

"The way we do our IT is we have a core group of people who work on key projects, but we then outsource quite a lot of tasks such as code writing to contractors, consultants and even the Tesco IT department. When you are developing the business, you need different skills at different times. There is no way we could go out and hire a snapshot of all the people we need because we know it will change in six months' time. We need to think fast on our feet."

He says that most of the £35m capital expenditure being invested in Tesco.com last year is into IT - particularly into the fully automated in-store picking system which features a PC on each trolley that tells the pickers where to go next after scanning each item.

Browett says Tesco.com's success has been built on getting the basics right. This pragmatic capitalist is scathing about some of the hot air talked in the dotcom arena, but argues that the bursting of the e-bubble will not affect "well-rooted" businesses such as his own.

"All that has happened with pure plays is that the fundamentals of business have come back into practice. I think that is healthy for the market because there were too many people running around with business plans which were unachievable and were not going to deliver value to the customers. They were reliant on putting prices up over time rather than working out what the business model is today.

"It's better to have well-executed, well-run businesses that are making money on the Internet rather than people who are not giving value to customers and not going to achieve their long-term promises."

He lists e-Bay, Dell and Charles Schwab as the e-commerce operations that he most admires. "They have created completely new business models, they have fashioned a successful business out of something that just wasn't there before. But I would argue that what we have done with grocery home shopping is as big a change to the market as what Dell did with its straight-through delivery. Both have fundamentally changed the competitive structures of their industry."

As for his competitors in grocery home shopping, Browett says, "We do not fear anybody. Nobody seems to have hit on an economic model that actually works - you can tell that by the fact that their sales are not closing up on us. But we don't take our lead for granted. Tesco has traditionally been paranoid number two and that is how it became number one. That is how it will stay number one - you cannot rest on your laurels."

Curriculum vitae: John Browett

John Browett, 36, joined Tesco in 1998 as business development director. After steering Tesco's corporate and strategic development - including mergers and acquisitions, new category development and profit improvements - he moved over to his current role as the head of Tesco's consumer Internet business and home shopping service in April last year.

Before that, he worked for five years at the Boston Consulting Group, which he joined after winning the Palmer Scholarship as an MBA graduate at the Wharton Business School. Originally a zoology undergraduate at Magdalene College, Cambridge, he has also worked for five years at Kleinwort Benson, making investments for a mezzanine fund in buyouts and other venture capital opportunities. Married with a young family, he lives in Highgate and lists dinghy sailing as an interest.

Battling through the technology constraints

Tesco is striving to make the online shopping experience a more enjoyable, efficient experience. One recent innovation is the introduction of Express Shopper, a new facility which allows shoppers to type in their shopping list, click a 'go shopping' button and then be transported to the aisles where items are stored so they do not have to search.

John Browett believes that faster, further-reaching Internet technology will revolutionise e-commerce and the potential for retailers to reach customers. "Broadband will make a dramatic impact on the Internet and its usability. Always-on is also going to significantly improve uptake," he says.

"We all know the Internet experience can be frustrating. But the question is about time - will the new technology take 10 years or three years to reach the mass market?"

He concedes he must work within the constraints of the system for the time being but, once the public does have access to the technology, he fully intends to exploit it. "We will be able to improve the customer offer by streaming videos directly through to people. We will be able to do things on the Web site that are not possible at the moment - the design and usability and product shots are obvious areas."

But he is cautious of investing too heavily in technology supporting platforms such as digital television and Wap-enabled mobile phones. "Digital TV and m-commerce are more appropriate for non-food than food shopping. The problem with the new platforms is that the platform owners want to get a very high percentages of sales. Platform owners are looking at i-mode in Japan and seeing that they are getting 9%, so they say they will get 8%.

"This percentage out of any retail business is very high - the only retail businesses that can afford it are the high-margin ones such as luxury goods and clothing. No one else has the margins. So they are cutting off the options for any major discount operation to work on those.

"In digital television, no-one has explained to me how the customer offer can be made attractive for retailing. Take the 'normal household' - what is the rest of the family going to watch when one individual is doing the shopping? It is lean back, not lean forward, and is hard to present the data in the right format. The modems on digital TV, frankly, are not fast enough. It will be a while before we see it having a major impact on a data-intensive process like grocery shopping."

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