Market Know-How: Who Profits from Home Deliveries?

Technical Skills

The Tekhnosila and Mir home appliance retail chains offer home delivery for bulky items in Moscow and the surrounding areas. Tekhnosila established its delivery service almost immediately after the company was founded.

Karina Chernikova, chief spokesperson for the chain says: “[We] deliver the goods ourselves, thus ensuring a higher quality of service at lower costs compared to outsourcing.” The company believes the delivery service is an advantage because it is convenient for buyers.

The Mir chain has been running the home delivery service for nearly 10 years. The company’s 10,000-sqm distribution center is situated in the town of Vidnoye, 3 km from Moscow. Orders for deliveries come in from all over the city where they are distributed by address from the center. During the peak season the company takes on extra staff.

Aleksandr Anufriev, head of the transport and warehouse logistics department at Mir, says that the company is set to introduce software that will help optimize delivery routes on the basis of the list of given addresses. The software, it is hoped, will help ensure accurate deliveries and an optimal sequence of stops over a two-hour period.

Free delivery of home appliances, furniture, gym equipment and other bulky items to the customer’s door within the Moscow Ring Road (MKAD) is also offered by Mosmart. The hypermarket uses no additional warehouse facilities delivering goods to the buyer directly from the manufacturer’s stockroom. Thus, the company saves considerably on rental costs, including the cost of renting warehouse space.

Such “tricks” are also practiced by online stores, offering an enormous variety of goods – tens of thousands of book titles, videos, CDs, numerous models of cameras and computer hardware – that are all stored in the manufacturers’ warehouses.

Online shops only use warehouse space for receiving shipments. For example, an online shops receives 1,000 orders for the delivery of camera and video equipment. On the following day the requested goods are delivered from the manufacturer’s warehouse to that of the online shop whose couriers then distribute them at the customers.

Several Moscow online stores are united in the eHouse holding. With sales exceeding $40 million in 2004 the company runs e-shops that sells computer hardware, air-conditioners, billiard equipment, office equipment, books, compact discs, software, perfumes, tea and coffee, package tours, mobile phones, toys, home appliances and even insurance products.

Goods are delivered by the company Skorokhod that also belongs to the holding. Skorokhod’s fleet includes 40 vehicles. The company employs several hundred loaders and couriers. The e-shops within the holding currently employ over 500 people.

Couriers deliver light-weight items on foot, or by public transport. Bulky hardware arrives at the customer’s door by car. Each driver in Skorokhod is assigned a certain district. “This is much more effective as drivers know their areas well and all the local addresses,” says Valery Gasratov, spokesman for eHouse.

Unfortunately, mistakes cannot be completely avoided. For example, a courier may deliver the ordered goods at a customer’s address but there is no one at home. In such cases the courier waits for 20 minutes and then leaves a note for the customer saying that the home delivery service had arrived, and leaves taking the ordered item back to the office.

Sometimes an ordered item arrives at the customer’s office but the person who placed the order is away from his desk, at a meeting, for example. “Sometimes angry customers call us saying that the courier did not have the patience to wait,” Valery Gasratov complains.

Local Problem

Establishing an efficient home delivery service in Moscow is possible as long as the chain operates a large number of outlets. If the chain is small, it will have to tackle the problem of warehouse facilities. Incidentally, it was just such a lack of warehouse space that brought about the demise of the only independent grocery delivery service 77.

“We were looking for warehouse facilities for the 77 service,” says Ruben Alchudzhan, head of the warehouse real estate at Colliers International. “It was a difficult task because such services require a logistics center in the city, but in Moscow all the warehouse facilities are situated outside the Moscow Ring Road.” Building a small logistics center within the city limits is also virtually impossible, holds Alchudzhan.

Former executives put the demise of the delivery service down to its inability to make a profit. This is hardly surprising considering the cost of warehouse facilities in Moscow, even if they are relatively modest. The annual rental rate of one square meter of class A warehouse space stands at about $125-145, class B costs $105-130, and class C $50-80, Knight Frank reports. The sale price is $750-800 per square meter for class A warehouse and $550-600 for class B facilities. However, warehouses rarely go on sale, Knight Frank says.

Unfortunately, with no warehouses at the retailers’ disposal home delivery services have little chance of making a profit. Even without this setback, home deliveries are scarcely profitable. “The volumes we could achieve by offering this kind of service were too small to make the service pay back,” says Eva Prokofyeva, PR-director at the Paterson retail chain. “We calculated the needs of the customers on the basis of polls held regularly, and the results convinced us that the demand was low, so we gave up on the idea of launching a delivery service.”

Natalia Orazova, spokesperson for Mosmart, agrees that home delivery services are barely profitable unless a retail chain runs a large number of outlets across Moscow. “So far we have only three stores,” she says. “Delivering goods from northern Moscow, say, to the south, is just not feasible considering the transport situation in the city.”

Besides, Orazova notes, “the share of such orders compared to the daily amount of customers that we have – 15,000 to 20,000 in each supermarket of the chain – would be trifling.” Neither can Mosmart afford to increase costs and, consequently, the price of goods because it operates a discount store format.

Grocery delivery is quite costly as the company needs a fleet of special vans, a team of delivery men, logistics experts and so on. “The service would push up the price of goods and we cannot allow that,” says Orazova. “Our target is to become the cheapest chain in the city.”

Different from the Others

Launching a home delivery service is reasonable for the retail chains that run outlets across the entire city. Those kinds of operators do not have to worry about warehouse rental costs. Home delivery services are offered by the retail chains Sedmoi Kontinent and Perekryostok. However, of all the outlets of the latter, only one store – situated in Gorki-2 on Rublyovskoye Shosse [motorway] outside Moscow – delivers goods to customer’s homes.

The home delivery service was set up by the Gorki-2 outlet jointly with the retail center Nash where Perekryostok is an anchor tenant.

Orders can be made by phone 24 hours a day, with information on the price of each item, its shelf life and availability in stock and, if need be, a consultation on the choice of goods. Other Perekryostok outlets gave up their home delivery services because they were unprofitable.

In order to build an efficient home delivery service, retail operators must have a developed chain of outlets targeting households with high incomes, market consultants have concluded. So far, Sedmoi Kontinent is the only Moscow chain that meets those requirements. It runs the largest number of outlets in the city and the purchasing ability of its customers is high enough to make large and expensive orders; otherwise, neither the store nor the buyer would be interested in home deliveries.

Interestingly, after the 77 service was closed the number of customers using the Sedmoi Kontinent delivery service grew. “At first, grocery home delivery was offered to customers as an additional service designed to maintain the image of the chain, but gradually it developed into a separate service and today that unit makes a profit,” says Anna Zaitseva, a spokesperson for Sedmoi Kontinent.

The company reports that while in late 2003 the delivery service received 200 orders a day on average, by the end of 2004 that figure had grown to 250-300. Its turnover has grown 53% and currently stands at $6 million per year. The service employs 161 people and runs a fleet of 31 vans.

Orders are taken by phone or via the Internet. Each outlet has its sales zone. Delivery is free if the price of the order exceeds 999 rubles; an order of 500 to 999 rubles is delivered for a charge of 50 rubles; goods worth less than 500 rubles will be delivered for 200 rubles. The chain delivers goods within the city limits (inside the Moscow Ring Road, MKAD); households outside the ring are charged an extra 10 rubles per kilometer from the MKAD, but goods are not delivered further than 50 km outside Moscow.

Why do some supermarkets offer such services while others consider them unprofitable?

Aleksandr Ivanov, president of the Russian Mail Order Association, believes that home delivery of groceries is at odds with the main principle of a food supermarket – goods availability. “We were beginning to set up a grocery home delivery service for one of the chains but gave up after one of the managers reminded us of that principle,” he says.

“Imagine, you come to the store to buy a loaf of bread, and suddenly you feel thirsty, so you buy some juice, then some new item catches your eye, some new widely-advertised brand of semi-prepared foods, and it also ends up in your shopping cart… As a result, you don’t content yourself with the loaf of bread alone as you would at the baker’s. Instead, you go away with a variety of foodstuffs and household goods. Would you buy any of that if you were making an order by phone or through the Internet?”

Ivanov believes that the delivery of goods may be profitable for supermarkets – for instance, Sedmoi Kontinent – that do no want to have their buyer tied to a specific outlet.