Supermarket trench warfare heads online

Woolworths and Wesfarmers are taking vastly different approaches to the online retail boom. One of them is bound to be wrong and will feel the pain for years to come.

The recent Wesfarmers presentation to shareholders confirms that the two supermarket giants, Woolworths and Coles, have adopted different strategies in the retail growth sector, online shopping. Almost certainly one of them is going to be wrong and the chain that gets it wrong will suffer well into the decade. Shareholders will be disappointed and heads will roll.

Woolworths clearly believes that online trading is going to grow by very significant proportions given what is happening overseas, and that a large proportion of that trade will be ordered online but, rather than delivered to the home, will be picked up by customers.

So a significant part of Woolworths’ so-called ‘Mercury Two’ plan is to revamp its distribution system so that customers in, say, supermarkets pick up their online ordered goods at Big W, Masters and Dan Murphy’s. In effect, every type of Woolworths store is a collection point for the other. This is a very big and expensive distribution system challenge but Woolworths believes that it will pay off (Woolworths and Coles draw different battle lines, March 6).

It became clear at the Wesfarmers shareholder presentation that Coles’ owner believes such an outlay is not worth the money. Those ordering online through Coles supermarkets will be able to pick up at participating Shell service stations but not at Bunnings, Target and Kmart. Similarly, online orders to Bunnings, Target and Kmart cannot be picked up in the other Wesfarmers retail chains.

Apart from regarding the Woolworths strategy as unnecessary, Bunnings is not strong in online trading -- a possible long-term weakness -- so it would be a huge change, and Wesfarmers traditionally looks at its retailing businesses as separate operations. It is possible some may be sold in the longer term.

Woolworths clearly believe the Mercury Two strategy will regain its mastery over Coles, and at least in one instance Coles’ down-the-line managers do not appear to understand what Woolworths has planned for them. Recently, one of Coles’ inner Melbourne supermarket pick-up points for online orders was closed and shifted to a supermarket in a suburb further out. Naturally, the inner-suburban Coles shoppers shifted to Woolworths, although the Woolworths methods could not cope with the Coles customer influx.

Coles executives may have told Wesfarmers that they had cut costs and no one at the Wesfarmers board would be any the wiser. And Woolworths directors will not understand that there is work to be done at ground floor level.

This is merely an example of the trench fighting that is ahead but it is these sorts of battles in community after community that will determine the winner. And, at least on Woolworths’ estimates, we are looking at at least 10 per cent of the market that is up for grabs -- but it could be much more.