Five reasons why online grocery warehouse makes sense for HOK-Elanto
Jukka Ranua, Development director, ecommerce and digital services, HOK-Elanto Image source: HOK-Elanto
On the 28th of October, S-Group announced long-awaited news about their investments in improving the efficiency of the online grocery operation. The information included a centralised warehouse in the Helsinki region and a Micro Fulfillment Center (MFC) in the Tampere region.
The decision by HOK-Elanto, the local co-operative in the Helsinki region, was significant as they opted against the popular MFC model adopted by many omnichannel retailers during the last few years.
“The fulfilment center enables the doubling of the current delivery capacity and guarantees our customers a wide and affordable product assortment in the future as well as reliable and fast deliveries.”
The centralised operation in the Helsinki region is a smart strategic move by HOK-Elanto that emphasises their strengths and gives some extra competitiveness.
The MFC has been a hot topic during the pandemic growth of online grocery. Several prominent retailers have opened or announced plans to open MFCs. It is an attractive option for an incumbent with a long history of operating stores.
The accumulated experience and investment in the store network make the MFC a low-threshold step to start improving the picking efficiency of the developing online business. An additional benefit of the MFC model is the proximity to the customers, as the customers live relatively close to the store. This enables the delivery operation to keep the driving distances relatively short.
However, MFC is, at best, a good compromise. It is often built inside an existing store. Therefore, it is subordinate to the store’s processes that have been constructed with other kinds of operations in mind. Moving the products and orders, as well as loading the vans, are all processes that need to make compromises when built into an existing store.
The store often produces much more sales than the online operation, thus making the online operation’s needs subordinate to the store’s needs.
Warehouses instead of MFCs?
Image sources: Tesco & ICA
Despite the recent popularity of the MFC model, centralised warehouses have some benefits. The warehouses are built entirely around the online operation, from incoming logistics to moving the assembled orders and loading the vans. This is a small but significant difference.
With high volumes, as in the case of HOK-Elanto, the centralised warehouse can enable a reliable and high level of online operations. Here are four reasons why I think the centralised warehouse is a good choice for HOK-Elanto (and one different topic to consider):
1. No substitutions
With no reliance on stores, the centralised warehouse can also make sure that the problems of in-store picking for the customer are not a problem. The biggest problem with in-store selection is the substitution of products. Substitutions are a result of lower transparency of store inventory.
With MFC, a significant portion of the assortment (regarding volume) is dedicated to online picking. Approximately 5-10% of the volume (80% of the assortment) is still picked from the store floor. With those products, the same substitution problems remain.
2. Reliability
Besides substitutions, the focus on online-only gives another advantage to the warehouse: reliability. The warehouse is not reliant on customers picking products from shelves nor on how busy the store’s aisles are. This makes it possible to forecast the capacities of the business more robustly and predictably.
The reliability can be seen in higher capacity and better predictability of the deliveries. When the volumes are high, the deliveries are scheduled tightly to enable as many deliveries per hour as possible. With less reliable operations in the picking and loading, the deliveries are more likely to leave late. If the first delivery is late a lot, it is difficult to close the time gap during the other deliveries.
Late deliveries produce a terrible customer experience and are bad for online businesses.
3. Efficiency
Despite MFC companies reporting high-efficiency numbers, they do not give a complete picture of the overall efficiency. The MFC operators of ten speak about picking speeds measured by items or rows per hour. On the other hand, the warehouse operators talk about UPH, Units per Hour.
In MFC (or in-store picking), the efficiency is typically measured only within the picking operation itself. UPH, in turn, calculates the efficiency of the entire warehouse (from products entering the facility to products leaving in the delivery vans).
MFC makes only the picking operation more efficient. Unfortunately, picking is only one part of online grocery operations. As mentioned above, with existing store operations taking the main focus, the processes are not streamlined with online in mind.
It remains to be seen how much more efficient the warehouses are. As a rule of thumb, one could consider that the warehouse would be approximately 3x more efficient than the traditional in-store picking. MFC operators have been saying that they improve the picking by around 4x. This picking takes into account about 70-80% of products in online orders.
The following 15% of products are picked next to the MFC machine. This is not 4x more efficient, but maybe around 2x more efficient.
Then there is the traditional slow picking in the store that is left for the long tail of the products. This covers around 5% of products.
4. High capacity & cost
Capacity comparison: warehouse vs MFC
One difference of the warehouse model is also the high capacity of a warehouse. Ocado builds some of the biggest warehouses for online grocery. One of the biggest Ocado warehouses in Erith has a capacity of 200 000 orders per week (link). According to Tesco, a bigger MFC can pick up around 1 000 orders per day (link), thus having a weekly capacity of 7 000 orders per week.
Tesco has also indicated that it takes roughly nine months to operate the MFC, and it costs around 5,5-6,5 million euros to build one MFC.
If one warehouse can cover from 75 000 orders up to 200 000 orders per week, it would take 10 to 30 MFCs to cover the same capacity. It would cost 50 M€ to more than 150 M€ to build them. As a comparison, Swedish grocery chain ICA invested 100 M€ when building an Ocado warehouse to serve the greater Stockholm region.
Therefore, a warehouse is highly likely to be a smaller overall investment than an equal MFC capacity. Additionally, it takes one to two years to build a warehouse, whereas 10+ MFCs will probably take much more. As a comparison, it has taken three years for Tesco to build five MFCs.
“Our volume is already so significant that we would have needed MFCs in many places just to cover the current volume, let alone future growth.
It is not possible to find spaces for this many in our stores. Especially as a large part of Prismas are in shopping centers.”
For HOK-Elanto, which gets around one million online orders per year or around 20 000 orders per week, it would have required building almost 20 MFCs. This would have taken time and it would have been expensive, especially in shopping center context.
The warehouse is also likely to operate with fewer staff as there are fewer work phases.
5. Flexibility in capacity
Warehouses are notoriously bad at scaling up during rapid changes in demand. This was seen as Covid hit the UK. Omnichannel players like Tesco and Sainsbury’s doubled their online capacities in weeks, whereas Ocado managed only about a 30% increase in capacity during the entire pandemic.
With sudden change spikes in demand, HOK-Elanto can also utilise the store network for home deliveries. As they have the picking for Click & Collect orders in the stores, it would be easy to redirect some deliveries to stores during unprecedented peaks.
Summary
Thus, the centralised warehouse would complement the in-store picking operation. After all, more than 50% of online orders within S-Group are collected from the store.
HOK-Elanto also seems to have a relatively good grasp on timing. Earlier, the online demand was way too low for a centralised operation to run at high enough capacity. Customers have experience buying groceries online, and the delivery volumes are too high for the stores to handle. In a few years, as the warehouse opens, HOK-Elanto should have a sufficient volume to have the warehouse run efficiently from the start.
The warehouse is also an excellent strategic move against the growth of Oda. Oda has had a stellar launch in Finland. It offers an unrivalled variety and price for home delivery in the Helsinki region. They can run an efficient and reliable online operation with a centralised warehouse. In delivery volumes, Oda will be able to challenge HOK-Elanto and Kesko in Helsinki.
With the warehouse, HOK-Elanto can offer the same efficiency and reliability as Oda but with the sourcing benefits, one has with the vast S-Group volumes behind them.