Expectations for 2022 - Finnish online grocery
Finland is finally getting a similar big online grocery pure player as Sweden (Mathem), Norway (Oda) and Denmark (Nemlig) have. The importance of the big pure play challenger is the fact that they
rely solely on online and thus want to push harder for the online adoption &
thus also irritate the bigger incumbent grocery retailers to invest more for the online channel.
This will lead to much better customer offering and increased adoption of online services. In Oda Finland will have a well funded pure player with high growth ambitions. It will be very interesting to see how the launch of Oda influences the overall grocery market in Helsinki region and how the incumbents Kesko and S-Group react to the new challenger.
Is Oda big or small?
From incumbents perspective it would be easy to disregard Oda as a small grocer. In Norway, Oda currently (last 12 months in July 2021) has about 230 M€ in annual revenue (source). That could be seen as only a meagre 2-3 % of the overall revenue of either of these two giants.
Kesko groceries did almost double the money in profits in 2020 than Oda did in revenue.
How could Oda be regarded as a challenger for these giants?
When one takes into account that Oda had its revenue come from one city and one channel, the image changes. Suddenly 200 M€ is more than either of the giants sell online in the Helsinki region.
When compared to the offline stores, 200 M€ would be almost double the revenue of the biggest grocery store in Finland.
HOK Elanto (the co-operative in larger Helsinki region) is the biggest retail chain in Finland. Oda would be about 10% of its entire revenue, with much smaller geographical coverage.
If Oda would grow in Finland to similar revenue levels as in Norway, it would most probably become the biggest online grocer in Helsinki region. To become the biggest online grocer in Finland it would take more time.
How will the incumbents respond?
Very interesting topic to follow in Oda’s launch is how Kesko and S-Group will react to it. Will they ignore it or will they attack it head on? Both options would probably be rather costly in the short or the long term.
Option 1: Ignore
If the incumbents were to ignore Oda, it would give Oda a lot of flexibility to grab market share in the affluent consumer segments in Helsinki region. Those customers could prove to be difficult and costly to lure back from Oda, which presumably can offer a more reliable service.
The faster Oda gets to big order volumes, the sooner they will reap the benefits of the efficiency of the warehouse model. This comes in the form of high picking efficiency, low waste in the assortment, improved sourcing prices and better delivery efficiencies. With those efficiencies, they can improve the service even further.
Therefore, ignoring Oda would be easy in the short term, but more costly in the longer term.
Option 2: Attack
If the incumbents were to attack Oda agressively, it could become expensive. The spending could raise concerns inside the organisations whether it is sensible to waste a lot of money on a niche part of the business that is inherently less profitable. These concerns could become significant especially, if price becomes more important for customers as a result of the increasing inflationary pressures.
This seems to have happened in Sweden, where ICA traders have started questioning whether ICA is investing too much for the small online channel.
How about competition authorities?
With the aggressive response, one can consider also the competition authorities. Both S-Group and Kesko have a dominant position in the market with approximately 47% and 37% of the market.
Since Kesko acquired Suomen Lähikauppa in 2016, the competition authorities seem to have taken stricter approach to the competition in the food sector. One example of that is the blockage of Kesko acquiring the food wholesaler Heinon Tukku.
If Kesko and S-Group were to use low delivery prices (of their unprofitable online services) to aggressively drive Oda out of the market, the competition authorities could see that as predatory pricing. That could possibly make life much more difficult and even more expensive for both Kesko and S-Group.
Micro Fulfilment Centers to the rescue?
The smart move from the incumbents will be to counter the influence of Oda by improving the efficiency of the existing operational models. Two generic alternatives for the incumbents are the warehouse model (by ICA) or the Micro Fulfilment Center (by Tesco).
Both have their advantages and in Finland Kesko has selected Micro Fulfilment Centers (MFC) as their preferred choice. It will be interesting to follow how the roll out of the MFC influences the overall efficiencies and product substitutions.
MFC will improve the picking speeds, but they are only one part of the bigger value chain of online grocery. With MFC’s, some disadvantages of the store based model remain.
Can Kesko really challenge Oda in providing a reliable and efficient online grocery service with little product substitutions and high availabilities for deliveries?
As the volumes grow, the custom made warehouse starts to provide advantages for Oda. As an exemplary calculation: Oda’s current annual revenue of 230 M€ would make approximately 7 000 daily deliveries (with 90 € average order).
Tesco has said that their bigger MFCs will be able to deliver about 1 000 orders per day, whereas the smaller ones deliver 500 orders daily. If one assumes that Kesko is building a bigger MFC, it would require seven MFCs to reach the same delivery volumes with Oda’s current level in Norway. However, the efficiencies would still be below Oda’s efficiencies, but significantly higher than the current level in the store-picking.
Based on the numbers communicated by Tesco, the network of seven big MFC’s would cost around 60-70 M€. It is reasonable to estimate that Kesko would have around 230 M€ of online revenue in Helsinki region in the near future.
From that perspective, the ICA/Ocado warehouse is not that unreasonably expensive. The biggest Ocado warehouses in the UK can handle up to 85 000 orders per week. The warehouse in Stockholm is not probably as big, but can probably handle around 10 000 orders per day. To build similar amount of MFC capacity would require around ten MFCs.
This analysis does not include the benefits from MFCs. Those include the ability to offer (fast) Click & collect, fast delivery, more efficient delivery routes or the possibility to whole assortment of the stores.
Whatever route Kesko and S-Group go, it will take a couple of years for them to get the efficiencies up. This will give Oda some time to grow their business.
Market to grow faster: the customer wins
With the increasing competition the growth for online grocery will probably also start accelerating. Year 2021 will probably see a slight increase in revenue from the huge jump in 2020. It will be very interesting to see how much the market grows in 2022 as the launch of Oda will certainly create a lot of buzz and discussion around online groceries.
One thing is for sure, the customer ends up winning as the companies compete to build ever better services. Hopefully, we will see more affordable delivery prices and new kinds of services already in 2022. It is promising to be an exciting year for online grocery in Finland.