Online proving hard for supermarkets: Summit bows out

Jan 15

The benefits of taking existing supermarket businesses online seem significant and there is clear customer demand for convenient, home delivery services, at least in the major conurbations. But successfully implementing an online supermarket business is expensive and subject to lots of competition. Summit, the Tokyo based chain owned and operated by Sumitomo Shoji, has decided to throw in the towel, demonstrating just how tough it can be, even for larger chains.

Summit has confirmed it will pull out of online food sales. The Sumitomo owned and operated chain is a significant player in Tokyo and has been selling online for just six years, but its decision demonstrates that switching to e-commerce might be something only viable for larger, more progressive supermarket chains.

Summit began experimenting with online orders from 2007 and Sumitomo established the Summit Net Super subsidiary a year later. Unusually, it decided to pick online orders, not in stores, but from dedicated distribution centres (DCs), with three built and operational by 2011. Although Summit forecast turnover of ¥100 billion within 10 years and breakeven by 2014, by February 2014 it had just 300,000 member registrations and continued to make a loss.

While unprofitable performance is mirrored by just about every FMCG retailer trying to make e-commerce work, Summit’s decision to pullout is a reasonable one. Its failure provides an object lesson in the pitfalls but, equally, it demonstrates the necessary conditions needed for any medium sized supermarket to make a success in online.

Summit is a successful chain, but, like many of its contemporaries, its core model is today ageing badly. The company remains tied to wholesale suppliers, failing to develop the volume of own brands and unique merchandise that consumers increasingly expect from better supermarkets. It has stuck closely to a limited geographical area and developed both logistics and supply chains to match.

Such a situation is pretty much standard for the vast majority of the 50,000 or so SME supermarket chains still in operation around Japan. Unfortunately for them, there are few ways forward. Higher volume, more progressive business models are fast coming to the fore, offering supply chains that stretch across regions and even internationally, and meeting customer demand for better value through private brands. Even for smaller chains online operations may seem like a supplementary low-cost channel that can easily be bolted on to complement store based sales. In reality a successful implementation requires more than just a web integrated ordering and CRM system and a bit of cash.

Investment volume is a major, unavoidable issue. The technicalities of both logistics and IT systems mean that more financially able players are likely to win regardless. Couple this with the fact that Aeon, Ito-Yokado and Seiyu all have huge supply reach, unique ranges of private labels, and larger store chains in the first place, and then add in their ability to compete on price if they choose to, and the opportunities for SME chains are far more limited than most are willing to admit. Japanese supermarket chains compete almost entirely on store location, so the opportunities to switch existing customers to the online channel are actually few and far between.

Summit’s decision to attempt deliveries from dedicated DCs was premature given the market size. Even the largest companies, notably Seven & I, are only just beginning to experiment with mixing both store and DC picked deliveries, splitting orders by product category, but until significant volume is achieved, DCs will have no more than a peripheral role. Store-based orders allow for more frequent deliveries over shorter distances and forego the need for investment in additional DCs. Aeon has integrated its system to allow DCs to take the strain during particularly high demand, learning the hard way that online orders skyrocket during extreme weather and following earthquakes.

Online sales of FMCG is undoubtedly the future, but it is likely a future that doesn’t include most of Japan’s SME supermarket chains. For the majority, the market is already too competitive and investment too steep to even bother and few can offer any kind of differentiating factor to standout from the crowd online. Low delivery charges will only be viable for so long and, again, only for the larger players, so companies wanting to make headway online need to find something extra to offer customers. In Summit’s case, it wasn’t just its decision to avoid in-store order picking, its wholesale-based business model, lack of own brands and limited store coverage were all also at fault, validating its decision to pullout. To succeed supermarkets are going to need a better, more differentiated range of products, lower prices, low cost, exceptionally rapid or convenient delivery, and even some all too rare marketing finesse. In the end, the chains that survive will probably need all of these.