Monday 13 July 2015

Tesco £40 minimum delivery spend, an each-way bet on basket-size?

Their new £4 surcharge on orders below £40, in line with Asda and Sainsbury’s, means that Tesco are crossing fingers that a sufficient number of core £25-users will either pay the surcharge or raise their order-quantities to £40+…

In practice, they are taking the basket-size route to fulfillment-cost amortisation vs. the blanket-distribution approach of Amazon i.e. delivery density – try tracking your next Amazon parcel and be impressed by the number of local deliveries your driver makes en route to your door.

The Tesco numbers look like this:

Order size £25
Tesco gross margin say 25%, i.e.       £6.25
Delivery charge, say £4                      £4.00
Delivery surcharge - £4                       £4.00    
Approx. cost of order fulfillment say £20.00

An improvement, but Tesco still loses say £5.75 per order

Order size £40
Tesco gross margin say 25%, i.e.  £10.00
Delivery charge, say £4                 £4.00
Delivery surcharge - £4                   £0.00    
Approx. cost of order fulfillment say £20.00                                          

Tesco loses £6 per order (i.e. needs incremental sales of £24 to cover the loss)

In fact, apart from increasing the base delivery charge, Tesco’s only route to break-even is via its gross margin i.e. say 25% of goods sold. This means they would need to increase the minimum basket-size size to £64, to break even on a delivery.

If Aldi enter the home-delivery race, my bet would be on them taking the localised delivery-density route, if Amazon don’t beat them all to it….

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