Online Grocery Business Essay
International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 57 701 E. Chocolate Avenue, Suite 200, Hershey PA 17033-1240, USA Tel: 717/533-8845; Fax 717/533-8661; URL-http://www. idea-group. com IDEA GROUP PUBLISHING 16#%%# Building an Online Grocery Business: The Case of asda. com Irene Yousept, University of Newcastle upon Tyne Business School, UK Feng Li, University of Newcastle upon Tyne Business School, UK EXECUTIVE SUMMARY This paper uses the case of ASDA. com, ASDA’s home-shopping arm, to demonstrate the challenges in building and developing an online grocery business in the UK.
To set the stage, the initial implementation and learning from phone/catalogue home-shopping in ASDA is outlined to demonstrate why e-commerce was seen as most economically suitable to conduct a grocery home-shopping business. Then the paper illustrates the development stages and critical aspects of ASDA. com’s Web shop. Particularly, it delineates the operational aspects of B2C e-commerce in the grocery business: fulfillment center and fulfillment process. The case will also describe ASDA’s efforts in overcoming problems with their home-shopping fulfillment model and present important elements of ASDA.
om’s virtual store and its operation. The paper concludes with the challenges that ASDA. com has been facing, their current status, and future prospects. Keywords: B2C e-commerce; digital economy; distribution channels; e-business; e-commerce expansion; e-commerce implementation;e-commerce needs; e-commerce planning; e-commerce problems; e-grocery market; e-operation; e-retailing; e-tailing; electronic business; electronic retailing; electronic shopping; information economy; Internet commerce; Internet economy; online grocery shopping; online shopping; service industry; virtual shopping; Web shopping; Web site design; Web-based commerece
ORGANIZATION BACKGROUND ASDA Stores Ltd. (http://www. asda. co. uk) was Britain’s second largest supermarket retailer, with a turnover of ? 13. 2 billion (for fiscal year ending December 31, 2003). The company’s trading activities involved the operation of food, clothing, home, and leisure superstores throughout Great Britain, mainly targeted at the British working class family. With its superstore format, the company had been very strong in non-food offerings. In January 2004, ASDA had 255 stores and 24 depots around UK with 122,000 employees and was a subsidiary of US-based Wal-Mart Stores Incorporated (http:// www. walmart. om), the biggest retailer in the world. This paper appears in Idea journal International Journal of Cases in print or electronic forms without written Copyright © 2005, the Group Inc. Copying or distributing on Electronic Commerce edited by Mehdi KhosrowPour. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. permission. 58 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 Wal-Mart Stores Inc. , ASDA’s parent, was founded by Sam Walton in Bentonville, Arkansas, United States (US) in 1962.
In the fiscal year ending January 31, 2004, the company was one of the biggest in the world, with a turnover of around $256. 329 billion (? 142. 405 billion) under the lead of H. Lee Scott, Jr. the president and CEO. In total, Wal-Mart had nearly 5,000 stores and wholesale clubs across 10 countries and more than 1. 3 million employees worldwide (which were referred to as the “associates” in Wal-Mart or “colleagues” in ASDA). The ASDA headquarters were based in Leeds. Leeds is the premier city in Yorkshire, one of the northern counties in the United Kingdom.
The company was founded by a group of Yorkshire farmers in 1965 as Associated Dairies. Its first store opened in the same year, and since then, it has specialized in bulk selling at low prices. ASDA then expanded into the South of England in the 1970s and 1980s. The company was acquired in June 1999 by Wal-Mart Stores Inc. In 2004, ASDA’s management team was led by Tony Denuzio, CEO for ASDA, which reported to John Menzer, president and CEO of Wal-Mart’s international division. ASDA acquired and retained customers by providing a broad assortment of quality merchandise and services at low prices.
Wal-Mart’s “Everyday Low Price” policy (EDLP) had gained ASDA the title of “British best value supermarket” for 7 successive years. In 2004, it offered around 25,000 lines of food and non-food. ASDA, as all other subsidiaries of Wal-Mart Stores Inc. , was ruled by three basic beliefs: respect for individuals, service to customers, and striving for excellence. These rules were established by Sam Walton (1992). Walton also claimed that the success of building the company could be pinned down into 10 rules that were still true for the company in 2004. These rules were (for details of these rules, refer to http:// www. almart. com): (1) Commit to your business. Believe in it more than anybody else; (2) Share your profits with all your associates, and treat them as partners; (3) Motivate your partners; (4) Communicate everything you possibly can to your partners; (5) Appreciate everything your associates do for the business; (6) Celebrate your successes; (7) Listen to everyone in your company; (8) Exceed your customers’ expectations; (9) Control your expenses better than your competition; and (10) Swim upstream. Go the other way. IT at the Heart of Strategy “People think we got big by putting big stores in small towns.
Really, we got big by replacing inventory with information” (Walton as cited by Wal-mart, 1999, p. 9). IT played a major role in the success of Wal-Mart. It believed that IT was a key facilitator in staying focused on customers: getting customers what they want, at the right place and the right time, and exceeding their expectations. The management of IT in ASDA was housed under the ISD (Information Services Division), led by Andy Haywood, who reported to Linda M. Dillman, Wal-Mart’s CIO (chief information officer). Figure 1 describes ASDA’s ISD strategy.
The acquisition of ASDA by Wal-Mart Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 59 Figure 1. ASDA’s ISD strategy W orld’s B e st In -C o u n tr y IS D T e am Clo se to O u r Cu sto m e r De live rin g th e V a lu e Th e Fo u n d a tio n s: Re lia b ility, S ta b ility, Re sp o n sive n e ss, G re a t Cu sto m e r S e rvice , Ta le n te d P e o p le Tra ckin g & Co m m u n ica tin g P ro g re ss
E xp lo itin g IT & G lo b a l P ra ctice s A d d in g V a lu e fo r th e Cu sto m e rs De fin in g W h a t S u cce ss L o o ks L ike meant that ASDA had access to the world’s best IT infrastructure for a retailer. IT integration between ASDA and Wal-Mart was completed at the end of 2002. In the long term, such integration would enable ASDA to grow without limitations, as was explained by Wal-Mart Europe ISD director in 2003: “…what we have done is to replicate to some extent the infrastructure we have in the rest of Wal-Mart to allow ASDA to expand in any way/shape/form they need to. In more immediate terms, such integration had enabled ASDA to leverage its supreme IT infrastructure to continuously maximize efficiency, lower prices, improve availability, increase the quality of goods provided, as well as widen variety. At the heart of the IT infrastructure, a very powerful tool that allowed such improvement was Retail Link. Since the acquisition was completed in 1999, a lot of effort was put into adopting and developing the system to conform to ASDA’s business practices.
In 2003, Retail Link facilitated the daily trading practices between ASDA and more than 1,000 suppliers. Retail Link was a proprietary Web-based exchange linking Wal-Mart (including ASDA) and their suppliers, or a private e-marketplace (Hoffman, Keedy & Roberts, 2002). In 2004, Retail Link was the biggest commercial data warehouse in the world (with 101 terabytes of capacity), which captured (among others) the point-of-sale figures – by item, by store, by day – enabling company and suppliers to track merchandise, study how the products sold, inventory information, and shipping deals.
The system integrated Wal-Mart’s EDI (Electronic Data Interchange) networks with an extranet used by the trading teams and some 10,000 suppliers. The sophistication of real-time Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 60 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 data gathered from its network then helped the company to develop sophisticated data warehouse tools and computerized data exchanges with suppliers.
The impact of Retail Link on ASDA’s business can be explained as follows: 1. Getting customers what they want: (a) Advanced data-mining for accurate merchandising. The availability of historical data in Retail Link allowed sales from the past 10 years to be combined with variables such as weather, holidays, and school schedules to predict optimal product supply for specific stores under a range of situations. In the price they want (even lower), when they want them: (a) Real-time data for minimized inventory cost.
Availability of real time data related to ASDA’s business enabled the company to implement a just in time supply system, minimizing inventory costs. The level of buffer inventory could be minimized, whilst still ensuring goods were always available when customers want them by automatically alerting vendors whenever supply was needed using point of sales figures from Retail Link. (b) Perpetual inventory and collaborative planning, forecasting, and replenishment (CPFR) for optimized replenishment (for definition of CPFR, refer to http://www. pfr. org). Instead of its previous systems of replenishment (store-driven ordering), with Retail Link ASDA imposed “perpetual inventory” using the timely information of sales, inventory, and so forth that were shared between the company and its suppliers. As such, the replenishment of goods could be continuously optimized. Retail Link also enabled ASDA and its suppliers to collaboratively conduct and analyze the planning and forecasting for related products. As a result, both parties could continuously advance their lanning and forecasting techniques for optimum replenishment, further improve communication, and deepen the supplier-buyer relationship. (c) Global purchasing for improved bargaining power and quality of goods. Retail Link allowed the aggregation of orders from different Wal-Mart divisions around the world into a single request to suppliers all over the world. By acquiring certain products from a single supplier, Wal-Mart was able to improve the quality of its goods as well as supply logistics and retail prices. d) Improved logistics capability. The timely information enabled by Retail Link allowed the logistics team to efficiently deliver goods from its hub-andspoke systems to stores, to respond timely to customers’ needs. 2. As can be gathered, Retail Link was an important source of ASDA’s competitive advantage: low-cost leadership. This discussion is aimed to provide an understanding of the company’s capability in continuously lowering prices, getting customers what they want when they want it, and exceeding their expectations.
However, while it serves as an excellent background to the case, Retail Link is not the main focus of this case study. This paper focuses on ASDA @t Home, the B2C e-commerce side of ASDA. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 61
B2C E-Commerce: Strategic Role to ASDA and Major Developments Before discussing the development of ASDA home-shopping initiatives, to enable readers to categorize major stages in ASDA’s home-shopping development, an overall timeline was delineated in Table 1. Online home shopping initiative in ASDA pursued a hybrid or brick-and-click model, which was the most widely adopted model for online supermarkets in the UK. Yousept and Li (2004) argued that in this model, existing players extended their off-line operations to include online offerings under the same brand name (e. . , ASDA @t Home, Sainsbury’s To You, WaitroseDeliver, Tesco. com). The adopters did not believe that the future of the supermarket business was fully online, and the bulk of their business still came from the traditional channels. Nevertheless, they were seeking for growth from online customers. Such a strategic role of ASDA’s B2C e-commerce was outlined by Wal-Mart Europe ISD director as an extension of the traditional branch-based business, as revealed below: I think that we see the dot. com operation as an extension or another way of touching our customers. We have seen a growth in our business on the web. We continue to try to grow that business. It’s important to us, because it’s another means to talk to our customers. But we are not what you would call a web company by any means, the bulk of our business continue to be through our stores. …Either through the web or…the web and the stores – the combinations of both will continue to be our customers. So, that’s what you see, a bit of the fusion of utilising the web or the brick and the click as a way to improve services to our customers. (Wal-Mart Europe ISD director) Table 1.
The timeline of major developments in ASDA home-shopping December 1998 – ASDA’s home-shopping initiative piloted, called ASDA @t Home January 1999 – ASDA @t Home launched via phone/catalogue with warehouse in Croydon, London July 1999 – ASDA @t Home launched PC-based home-shopping using CD-Rom together with phone/catalogue; another warehouse was opened in Watford, London November 2000 – ASDA @t Home online home-shopping was trialed December 2000 – ASDA @t Home online home-shopping was launched July 2001 – PC shopping with CD-Rom was terminated August 2001 – ASDA @t Home embraced in-store picking model, running together with warehouses January 2002 – ASDA home-shopping warehouses were closed and full in-store fulfillment was rolled out nationally from 32 stores; Web site development and maintenance were outsourced to third party February 2002 – Digital TV shopping launched with Sky Digital January 2003 – Digital TV shopping was terminated August 2004 – Expansion of home-shopping to 21 more stores, covering 40% of UK population End of 2004 – ASDA @t Home changed to ASDA. com Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 62 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 The next section outlines the competitive situation in the UK supermarket industry to provide a background in understanding where ASDA was situated within the marketplace. Afterwards, the setting of the case study will be outlined, followed by the case study itself. This paper concludes with the challenges and issues faced by ASDA @t Home at the time of writing.
Supermarket Industry in the UK In 2003, UK grocery market was predicted to be worth ? 115. 0 billion (Institute for Grocery Distribution, IGD, 2004). Within this figure, TNS industry group Superpanel indicated that more than 75% of the market share was owned by the “Big Four” supermarket multiples, with composition as follows: Tesco with 27%, ASDA with 17%, J. Sainsbury’s with 16. 2%, Morrisons (including Safeway) with 15. 2% (BBC, 2003). Other supermarket players included the fifth competitor within the top five, Sommerfield, as well as those targeting more upmarket segments of the UK population, Marks & Spencer and Waitrose (owned by John Lewis Partnership).
The competition between players within the Big Four had always been very intense with Tesco leading the pack since 1995. Soon after the takeover of ASDA by WalMart, both J. Sainsbury’s and ASDA started competing for the second place, which was finally won by ASDA in 2003. Indeed, in 2004, J. Sainsbury’s were struggling with internal problems and strategic directions. Following a major restructure in the company, the company still suffered from a static sales growth. Its interim results for 2004/2005 showed 50. 5% decline in profit from the previous year. The fourth player, Morrisons, had only emerged to the table following its takeover of Safeway in 2003.
Among the Big Four, ASDA, Morrisons, and Tesco had been positioned as lowcost or value providers, with ASDA targeting a slightly lower level market than Tesco, while Morrisons was more or less similar to ASDA. J. Sainsbury’s, on the other hand, had been trying to reach a slightly higher end of the market, yet was “caught in the middle” when competing with the likes of Marks & Spencer or Waitrose. Its loss of market share against ASDA illustrates that price was still a key factor for customers (Michaels, 2004). The distribution of power between supplier-retailer-consumer in the grocery industry had evolved in the last few decades. While in 1970s most power was held by producers that supplied grocery retailers, between the 1980s to mid-1990s, the power had shifted to the retailers.
Nonetheless, since the late 1990s, consumers were claimed to possess the most power (as revealed by ASDA’s head of ISD infrastructure during an interview) along with their changing lifestyles and demographics. As such, there had been a transformation in the UK supermarket industry marked by intense competition and tighter profit margin to players. This development had then forced retailers to pursue better partnerships with their suppliers (Zairi, 1998). At the same time, physical expansion got harder along with increased population and market saturation. Such a situation had made customer acquisition and retention difficult. More than ever, retailers were forced to experiment with creative innovations (e. g. product, store format, service) and adoption of advanced new technology to achieve the optimal rate of operational efficiency as well as customers’ shopping experience. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 63 SETTING THE STAGE FOR ONLINE SHOPPING In the face of difficulties in the grocery market since late 1990s, as outlined above, home-shopping was seen as an attractive option for supermarket players. The UK grocery market was oligopolistic with high utilization of average store space.
Therefore, it was arguably very suitable for the grocery home-shopping business (Boyer & Frohlich, 2002). In fact, the need for a grocery home-shopping service had been identified for decades. Nevertheless, in the UK there had not been a mechanism of rolling it out profitably. This was due to the efficiency of the self-service model in grocery retailing, coupled with a tiny profit margin related to the business. The economical offering of homeshopping services was not possible without charging customers excessively due to the expensive labor and logistics costs. The year of 1990 marked the beginning of the UK grocery home-shopping era with the launch of The Food Ferry (http://www. thefoodferry. co. k), the world’s oldest operating grocery home-shopping company. This company used a catalogue home-shopping model and outsourced its goods to local suppliers targeting a small area of customer households around central London. Later on in the mid-1990s, some of ASDA’s strong competitors, Tesco and J. Sainsbury, had entered the online shopping market (1995 for Tesco and 1996 for J. Sainsbury). Inspired by the development of online grocery supermarket in the US as well as the aspiration to capture competitors’ market shares, both players started investing in building the online grocery market. They were also followed by several other supermarket players. During this time, both Tesco and J.
Sainsbury had been fulfilling customers’ orders from their stores. (In 1999, J. Sainsbury started investing in a warehouse for home-shopping purposes. ) ASDA took a “wait and see” stance for their e-commerce launch and opted for a phone/fax catalogue-based shopping to start with (Faragher, 2002). In order to bring ASDA’s offering to a whole new audience, ASDA’s first ever home-shopping initiative was piloted in December 1998. The business, called “ASDA @t Home,” initially sold groceries. After a two-month pilot, ASDA @t Home went live in the form of catalogue home-shopping, adding paper-based catalogues to the existing online catalogue, offering next day delivery.
Orders were taken by several phone operators or by fax via a small third-party call center with links to ASDA’s home-shopping systems. Figure 2 explains how the shopping process was conducted during these days. The business offered a full product mix with 5,000 lines of grocery products from its dedicated home-shopping warehouse. This service charged ? 3. 50 (free delivery charge for order over ? 50. 00). ASDA @t Home was then led by Angela Morrison, the head of home-shopping, who reported to ASDA trading director, Mike Coupe. In contrast to its traditional market segment, the home-shopping arm had been cherry-picking south London’s most affluent neighborhoods during its first roll-out.
Traditionally, the company had a stronger presence in the northern part of England and focused on middle to lower economic classes. At the end of its 2-month pilot, the service was extended to reach as many as 450,000 upmarket households within the radius of 15 miles from its first home-shopping warehouse in Croydon, South London. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 64 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 After less than a year of running the business, supporting existing home-shopping systems with a third-party call center had proved very expensive for ASDA.
A lot of it had to do with the cost of phone operators, which facilitated the main channel of getting the business. As seen in Figure 2, the customer ordering process was very tedious. It took on average 30 minutes per order (Whalley, 1999) plus 15 to 20 minutes of keying in orders to the system, which added up to only 1. 14 to 1. 235 orders per hour (taking into consideration 5% tolerance, e. g. , for operator’s personal needs and changeover time between one order to another). Rough calculations tell us that the ? 3. 50 delivery charge per order would barely cover the operators’ wages, assuming standard minimum pay of ? 4. 80 in 1999 (DTI, 1999, http://www. dti. gov. uk/er/nmw/nmwhist. htm).
Furthermore, low profit margins of the grocery business would have to cover fix and variable costs inherent in the home-shopping service (such as driver costs, petrol, depreciation costs for vans, warehouse operation costs, labor costs for picking and packing customer orders, and others). Figure 2. Phone-based catalogue shopping ordering process for ASDA @t Home Start Ordering Process Customer register details on the phone Phone Operator take details and ask customer to read 6 digit codes next to catalogue Customer read 6 digit codes Phone Operator read out product Product Correct? Yes Any special instruction? Yes Special instruction recorded by operator No No Is there any other orders? No Customer pay with credit/debit card on the phone Yes Operator key in order to PC system, automatically downloaded to Home shopping server Finish Ordering Process Copyright © 2005, Idea Group Inc.
Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 65 July 1999 marked the gradual changeover from phone/fax to include PC-based home-shopping. It was Octavia Morley, ASDA’s director of home and online homeshopping who was directly responsible for the venture. Trials of PC-based shopping were conducted in August that year. Customers used a CD-Rom, which allowed them to order the whole range of products available from the catalogue. PC-based orders would be created off-line, and then customers would connect to the home-shopping servers using the Internet to transfer their orders.
At about the same time, the company started its second warehouse in Watford, expanding their reach to another 250,000 households; they also had planned another 13 to 15 depots nationwide in 2003. The trial was successful; Morley reported that it was a significantly cheaper channel to conduct a home-shopping business (compared to phone/fax) (Mugan, 1999). PC-based home shopping acted as a trial for a seamless multi-channel homeshopping offering that was seen as the preferred choice by ASDA’s management since the year of 2000. The completion of Wal-Mart’s acquisition of ASDA promised big developments for ASDA @t Home. In total, it had been around two years since ASDA had started piloting its home-shopping operation to the point at which www. asda. com “went live” to take customer orders.
During this time, the company had learned from its competitors’ mistakes and perfected its warehouse operation. After it was launched in November 2000, the company started expanding its services until yet another major changeover in 2001 for ASDA @t Home’s operation. This fact showed how complicated the implementation of an e-commerce application was, even for a company with such vast resources. The next section provides a discussion on the development of ASDA @t Home online, the problems it faced, how it overcame them, and its vision forward. CASE DESCRIPTION: ASDA @T HOME WEB SITE In summer 2000, a team of 20 people was put together to start the ASDA @t Home e-commerce project (Spence, 2002b).
This was the starting point of ASDA @t Home’s migration to a higher level of home-shopping operation. For over 6 months, the team conducted the design, coding, testing, and deployment of the ASDA. com Web site. They identified several critical aspects for the Web site, among all: techniques for finding products, checkout mechanism, shopping basket facility, delivery booking, security, customer help/guidance, account information, and registration. In November 2000, ASDA @t Home launched their Web site for a closed community. For this, a team of developers was put together to support the launch of the Web site in Bentonville (Wal-Mart’s head office).
The project team rapidly ironed out initial glitches using feedback from the initial users of the site, ready for the full launch in December 2000. When the Web site was finally launched, ASDA @t Home allowed customers to be able to hop between the Web and telephone, at the time offering 6,000 lines of products. Customers could even “mix and match” between different ways of accessing ASDA @t Home to place an order. The business had also launched its Interactive Digital TV shopping in 2002. This, however, was closed down after approximately a year in operation. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 6 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 Customers’ Orders Fulfillment A key element of online grocery was how fulfillment was handled (Boyer, Hult, Splinder & Santoni, 2003; Ellis, 2003). There were two basic models available (Tanskanen, Yrjola & Holmstrom, 2002). The first was to piggy-back on an existing supermarket or cash and carry (this will be referred to as in-store picking). Online grocer could either pick goods from its existing supermarkets/cash and carries or, in the case of pure plays, from others’ stores. The second alternative was to serve the online grocery customers by building a dedicated picking center, either automated or not.
In comparing both models, according to Delaney-Klinger, Boyer, and Frohlich (2003), the in-store picking model would minimize cost when sales were limited by sacrificing some degree of picking efficiencies. Furthermore, this model would enhance existing customers’ shopping experience as goods were delivered from their local stores (Seybold, 2001). Nonetheless, in-store fulfillment bore the risk of cannibalization to the existing stores, as shoppers needed to compete with in-store pickers; it would also be inefficient for huge volumes (Boyer & Frohlich, 2002). With a dedicated fulfillment model, a company could serve much more orders than with an in-store model. The order fulfillment process could be optimized, and the cost of picking could be minimized with this model.
Furthermore, food quality as well as availability could be ensured by having a dedicated center (Roberts, Xu & Mettos, 2003). Customers could benefit from almost real-time visibility to the availability of goods when ordering from companies using this model (Yousept & Li, 2004). Nevertheless, this model required a significant upfront investment; Webvan, for example, spent $25 million (? 13. 8 million) for each of its automated warehouses (http://www. cnbc. com). Furthermore, it also entailed more logistics cost compared to the in-store picking model, as warehouses were usually built relatively far from customer residence (Roberts et al. , 2003). Table 2 compares the limitations and benefits of both approaches.
Rather than implementing any of the fulfillment models in their purest form, companies could also implement a hybrid model, an operational option between in-store picking and a dedicated fulfillment center (Yrjola, 2001). This way, players were trying to combine the benefits of both worlds. In practice, there was no best way of implementing a hybrid model. In the UK, due to the emerging development of the online grocery business, in 2004, a lot of experiments were still conducted to find the best way for each player to optimize fulfillment. For example, Tesco in the UK had different combinations of its online shopping fulfillment model: 1. 2. In-store picking for grocery goods.
Combination of dedicated/in-store for wines: Cases of goods were picked in a central depot, they were then sent through to stores. In the designated store, wines were then being cross-stocked (i. e. , they did not go the store’s stock). Finally, they were shipped to customers. Outsourcing for items, such as CDs, DVDs, white goods, and general merchandise, to a third party (where the company used the supplier’s warehouse). 3. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 67 Table 2. In-store picking vs. dedicated picking center
In-store Picking Benefits Negligible start-up cost Instant coverage of service to wide audience using supermarkets network nationwide Dedicated Picking Centre Limitations Significant start-up cost Only covering areas surrounding the warehouse (even though each warehouse can cover a much wider area than a store), therefore slow coverage to wider audience Significant additional operational cost, wastage, overhead and other cost related to running a warehouse Smaller range of products offered Little extra to current operational cost Wide range of products offered (following the store’s range) Limitations Limited home-shopping fulfilment capacity Inefficient picking process – high cost No visibility of goods availability Risk of error in goods replacement Big risk of product error in general Disturbance to offline customers Lower assurance over food quality in online order fulfilment
Benefits High home-shopping fulfilment capacity Optimised picking process – low cost Near real-time visibility of goods availability Limited chance of the need to replace goods Less risk of product error in general No disturbance to offline customers Better assurance of food quality in online order fulfilment Nevertheless, embracing hybrid models usually involved different customer ordering systems, back-end systems as well as fulfillment processes. In some instances, players might decide to adopt hybrid methods for different geographical areas with varying levels of demand and population density. This might sometimes result in twice the effort of designing work practices and investment in different systems. The problem of home delivery service also represented a big challenge in online grocery shopping (Punakivi, Yrjola, & Holmstrom, 2001).
One of the most important factors that affects the cost for home delivery was sales per area (sales per mile2 or km2) (Yrjola, 2001). The more sales there were until a certain point, the lower the cost of home delivery. This represented a challenge for a dedicated fulfillment center. Other important aspects were related to the delivery time window offered to customer as well as when the delivery was in comparison to the order. Different combinations included one-hour delivery window, two-hour delivery window, either next delivery or longer (Punakivi & Saranen, 2001; Punakivi, Yrjola & Holmstrom, 2001). ASDA @t Home fulfilled its customers’ home-shopping orders using a dedicated warehouse.
This model was chosen for ASDA @t Home’s operation instead of the instore picking model to avoid the cannibalization of their existing stores. It was believed Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 68 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 that a bespoke dedicated fulfillment model would be more efficient than an equivalent store operation, which was designed to ensure maximum shopping enjoyment, impulse buying, and ease of finding based on consumption habits. Arguably, the traditional supermarket store design could not produce the optimal process to fulfill customers’ homeshopping orders.
The dedicated warehouse model would also be able to handle a greater volume of orders (Spence, 2002a) and enabled ASDA @t Home to reach areas where it did not have a strong presence at the time. The Changeover ASDA @t Home had been operating for 18 months when it became apparent that the dedicated fulfillment center was not suitable to support the growth of the business. Roundabout the time of introduction to a new multi-channel platform, Iain Spence was conducting a feasibility analysis to compare in-store fulfillment and ASDA’s warehouse model; he concluded that in-store picking was more commercially viable. This was confirmed by ASDA’s general manager for e-commerce in 2003. There were several reasons why a dedicated fulfillment center would not be suitable for ASDA @t Home: 1.
Low customer uptake for online grocery home-shopping while it was very expensive to run the warehouse. ASDA @t Home was experiencing problems in achieving breakeven on the warehouse operations costs on a daily basis. Both existing warehouses had problems reaching the breakeven point of 500 orders a day. The short shelf life of much food led to a massive amount of wastage, while no steady income was definite. In addition to wastage, other aspects (e. g. , rent, depreciation, labor) also added to the expensive cost of warehouse operation. Some unconfirmed reports quoted warehouse operational losses as large as ? 7 million (e-logistics, 2002). Small coverage of ASDA @t Home’s current warehouses.
In August 2001, ASDA @t Home only covered around 3 million households, equal to only 12. 29% of the whole UK population (the UK had around 24. 4 million households at the time, http://www. nua. com). As such, the business was only exposed to around ? 35 million of UK annual online grocery market at the time around ? 285 million annually. Coupled with competition with other online grocery providers, some which had a better “grip” on the market, this only left ASDA @t Home with a small slice of the pie. It took a lot of investment to expand the business further with the current model. Building new warehouses to enable national roll-out (13 to 15 as planned) would have cost ASDA around ? 26 to ? 30 million of investment (? million for each of the warehouses, according to Goddard, 2002). Smaller variety of product offerings with dedicated fulfillment center. With their current warehouses, ASDA could only offer 6,000 lines of products (in comparison to some 11,000 lines of products when they started the in-store picking model). This number represented their most popular products in-store to ensure that wastage was minimized. Customers who were used to consuming certain 2. 3. 4. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 69 rands or certain flavors of products might not be able to purchase it at ASDA @t Home and had to do it elsewhere. This could result in loss of business or even reduction in customer satisfaction and less repeat purchases. In March 2002, a big project was conducted to migrate ASDA @t Home’s fulfillment model to a full in-store picking model (The different stages of fulfillment centre migration were constructed based on Spence, 2002a, under written permission. ) To ensure that customers only experienced minimal disruption, in January 2002, ASDA @t Home stabilized their warehouse systems as a short-term tactical initiative to keep them operational during the migration period (Spence, 2002a).
Meanwhile, manual in-store picking operations were trialed in-store to perfect the process design: ensuring optimal picking, packing, and delivery of customer orders. At this stage, a minimal system was built to be thrown away quickly. At the back-end of the Web site operation, a “smoke-and-mirror” approach was used: instead of automated electronic transfer of customer shopping orders and automated devices for picking process, orders were printed out in-store, and paper-based picking sheets were used to pick products. This stage proved successful, which then led the company to the development of in-store picking technology. An out-of-the-box system was chosen from Excel’s retail services division.
It downloaded orders from ASDA @t Home’s Web site and transmitted the details via WAN (wireless area network) to handheld terminals carried by pickers (e-logistics, 2001). After orders were picked and packed, drivers (who carried the same devices) would deliver the goods to customers’ doors. The palm-based system provided picking support, product tracking and tracing, matched deliveries to the corresponding address, and accepted doorstep credit card payment and electronic signing (Grocer, 2004). Following this, to facilitate ASDA @t Home’s particular business requirements and to optimize processes and service levels, customization of the technology was conducted along with its integration into the multi-channel platforms.
A full store trial then went live, shortly before it was launched in 20 stores within 8 weeks. The pilot had proved successful with satisfying process design and highly acceptable implementation methodology. As such, the in-store picking model was ready for roll-out. In the middle of 2001, ASDA @t Home started to embrace an in-store picking model nationally. At this stage, both in-store and dedicated picking centers were running side by side. In January 2002, 22 stores were already serving ASDA @t Home’s customers using these systems. They were scattered all over the UK: the Midlands, Yorkshire, Lancashire, Wales, the South, and the Southwest of England.
ASDA announced the closure of its home-shopping warehouses in January 2002, after pursuing all efforts to minimize the negative impact on their business. Three hundred thirty of ASDA’s employees (colleagues) affected by the closure were mostly redeployed in other parts of the company. In March 2002, a temporary service shutdown was experienced by ASDA @t Home’s customers who had previously been served by Croydon/Watford warehouses. Since then, ASDA @t Home’s service had been wholly fulfilled from 32 stores reaching around 30% of the UK population. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 70 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005
Although the company planned to roll-out to cover 60% of the population by the end of 2002, ASDA @t Home chose to stay with only 32 stores (30% of the population) until the end of July 2004. This was a decision from the management who were not prepared to rush into expansion while they were perfecting the systems and processes to make the business operationally profitable, as was claimed by ASDA’s general manager for e-commerce in 2003. In January 2004, ASDA @t Home was run by a dedicated team that reported to Paul Mancey. From ISD, Doug Cliffe, general manager for e-commerce, was responsible for the systems side of e-commerce to facilitate requirements of the home-shopping team.
A team of 30 was assigned to deal with the ASDA @t Home operations, including marketing and merchandising. For day-to-day operations, the in-store operational level was dealt with by a separate home-shopping team in each store made up of pickers, van drivers, and managers of the home-shopping department. In Bentonville, around 12 people were assigned to deal with Web site development and maintenance. This function was taken over from a third party in 2002. In the end of 2004, the business name of ASDA @t Home was changed to “ASDA. com”. The Virtual Store and Fulfillment Processes ASDA. com’s online home-shopping was ruled by four values: convenience, range of products, price, and service delivered (Fox, 2004).
In August 2004, ASDA charged a fee of ? 3. 50 for delivery, with free delivery for shopping over ? 99. 00. This was the cheapest in the market. Products were sold online at the same price as those in-store, and around 15,000 lines were offered. At the time, the role of the call center was fully advisory and for receiving complaints. The call center was gradually decreasing, evolving into a support mechanism for the online channel. To get a better understanding of ASDA. com, the virtual store, shopping process, and order fulfillment will be explained in this section. Table 3 summarizes the Web site’s features while Figure 3 shows ASDA. com’s virtual store.
On the other hand, Figures 4 and 5 outline the main customer shopping process as well as order fulfillment and delivery. For delivery, each store was divided into one or more zones to enable delivery planning. Pickers used several totes (crates used to place groceries) in the picking process, each comprised of a particular department (e. g. , frozen) and corresponded with customer orders. By the end of the process, the numbers of totes already filled with orders were manually handled and “ticked off” from the list. The procedure was then copied into a delivery manifest for loading to vans (Fox, 2004). Ambient products (products that were stored in room temperature, e. g. cereals) were mainly picked by night shift pickers, while chilled and frozen products were picked two hours before loading (Fox, 2004). In Table 3, readers can learn how ASDA designed the important aspects for online shopping as identified by Spence (2002b), which was previously outlined (see http:// www. asda. com). First, to find products, customers could perform a search, browse by aisles (e. g. , dairy, milk, eggs), generate an automatic shopping list from one’s previous three orders, or create shopping lists from scratch. ASDA also allowed customers to enter a few details from till receipt to automatically generate a shopping list. Second, virtual shopping basket appeared in every page to inform customers about the goods that Copyright © 2005, Idea Group Inc.
Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 71 Table 3. ASDA. com: Important aspects of online suprmarket’s Web site structure Aspects Techniques for finding products Checkout mechanism Shopping basket facility Delivery booking Asda @t Home’s website features “Search” facility, shop by aisles, previous 3 orders, personal shopping list, and enter few details from the receipts of ASDA’s supermarket tills. Involved 3 steps: check delivery & order details, make secure payments & submit orders, as well as check receipts.
Appear in every page, summarising delivery details, goods in the basket and total spending so far. The amount of each item could be amended at any time. Delivery booking could be conducted anytime before, during, after shopping. Asda @t Home had 2 hour delivery window (everyday from 10 am – 10 pm). Customers should choose a day and a delivery slot. The website was 100% secure, using 128 bit of encryption for payment. 2 types: Frequently Asked Questions page as well as customer call centre (phone and email). Account information was protected by password and user number. This could be amended in a separate page. Account registration should be done before shopping was conducted.
Customers should enter a postcode, after the systems were sure that Asda @t Home delivered to that area, then customers should register their names, contact details and delivery addresses Security Customer help/guidance Account information Registration Figure 3. ASDA. com virtual store they had chosen to purchase. Third, to assist shopping, customers could access the help page (that provides FAQ-type information) or call/e-mail the contact center. Other aspects of the virtual store in Table 3 are self-explanatory and therefore will not be discussed further. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 2 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 Figure 4. Customer online shopping process at ASDA. com Online Shopping Start Customer Register by first entering postcode Customers can: leave contact details to be informed when the service is going to that area or about local store, look around the shop, learn how to shop online Asda @t Home inform Asda @t Home No that they deliver to that have not area? delivered to the Yes area yet. Stop Online Shopping Book Delivery slot Choose products: by aisles, “search”, previous orders, quick start shopping Add products to shopping basket No Finish shopping? Yes Proceed to checkout Check delivery & order details Details correct?
No Yes Choose payments Submit orders & payments Receipt correct? Yes Finish online shopping No Change details Amend orders ASDA. com Today: Opportunities and Visions Forward The growing online home-shopping market in the UK in general and online grocery in particular potentially presented a big opportunity for ASDA. com (around ? 1 billion in 2004 according to Hayward, 2004). As has already been discussed, with Retail Link, ASDA owned a powerful source of low-cost leadership ability. As the company perCopyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.
International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 73 Figure 5. ASDA. com in-store fulfillment process In-Store Fulfillment Start Data of customer shopping details transmitted to nearest store In-Store PC records data and automatically assign customer orders in batches for picking Palm Pilot downloads orders in batches Pickers guided by palm pilot around the stores and pick several items at once Product available? Yes Products scanned into palm pilot No Product marked as missing Items in the tote are scanned again through the EPOS No Yes Substitution ? Products substituted Items are placed in totes marked with Yes customer orders Orders handled for delivery Any other items to pick?
No Pickers go back to warehouse to log palm pilot to PC, inform the PC that the batch has been picked In-store fulfillment process finished fected the service levels, operational efficiencies, and the performance of the Web site, its low-cost leadership ability should have allowed the company to attract online customers that were otherwise – by default – less loyal than traditional customers. In the long run, ASDA aspires to have the ASDA. com division dissolved into its main business and seamlessly integrate the “brick” and “click” parts of the business. In the virtual world, customers were no longer limited by the physical establishment and could easily switch between different shops.
The increasing convergence of online supermarket shopping sites (in terms of shopping processes and facilities) also Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 74 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 made price one of the most powerful differentiating mechanisms. Therefore, there was a real opportunity for ASDA. com becoming an engine of growth. This was explained by the general manager for e-commerce in 2003: …our aim is to win a lot of regular (competitors’) shoppers. …if we’re getting the delivery and the service that customers require…we can deliver it in much less cost than (competitors).
Then, we hope to have an Internet shopping operation which will not be existing ASDA shoppers. (ASDA’s general manager for e-commerce) For this to materialize, however, there was a lot of work still to be done by the ASDA. com team. One issue was operational efficiency, which could be gained from the synergy of different Wal-Mart subsidiaries. To enable global leverage of all WalMart’s subsidiaries’ online home-shopping systems and processes, a team of Wal-Mart staff from all over the world was founded, called “lowcost. com”. It included representatives from ASDA. com in the UK, superhour. mx in Mexico, walmart. com in the US, and a Wal-Mart technical team from Bentonville.
This committee regularly discussed strategic direction, current initiatives for e-commerce solutions and the sharing of best practices. In January 2004, lowcost. com was working to achieve what they referred to as the “85/15 principle”, where 85% of e-commerce development would be conducted globally, and the remaining 15% would be conducted in-store/in-country specific. For ASDA. com itself, a global in-store pick solution instead of packaged-based solution was seen as the key method to gain operational benefits. Doug Cliffe claimed, “a global instore pick system will actually introduce a lot more efficiencies on our current picking fulfillment model. ” The ISD team expected to complete the global in-store solution toward the end of 2004, when ASDA. om could then accelerate its growth. CURRENT CHALLENGES FACING ASDA. COM Customer Uptake for Online Grocery Shopping Despite the growing market of UK online grocery shopping, a lot of customers were still uncomfortable buying food online. Issues included security, shopping habits, difficulties conducting online shopping, the customer’s lack of control in making a choice, and delivery charges. ASDA. com and all online supermarket players were faced with the challenge of “educating customers” to change the grocery shopping habit of their lifetime (Boyer & Frohlich, 2002, p. 000) and build their trust to adopt online grocery shopping. For ASDA. om, challenges also lie in capturing a bigger slice of the market share (currently still less than its overall market share of 16. 5%). The small number of online grocery players (only 6 in the UK) meant that direct competitors were few, and the company should expect to have bigger market share than its off-line operation. ASDA. com faced the challenge of increasing its business as well as providing the capacity to meet Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 75 uch an increase. In early 2004, Fox (2004) conducted an investigation of one of the 32 stores that conducted ASDA. com in-store fulfillment and reported that the store was planning to increase its daily transactions to 1,000. Increasing Churn Rate, Repeated Purchases, and Profitable Basket Sizes Ellis (2003) argued that one of the biggest challenges for online grocery retailers was to take customers quickly through their learning stage to become a comfortable user of online grocery shopping. Until the fifth purchase, the likelihood that a customer would leave the business was still fairly high, as revealed by ASDA’s general manager for e-commerce.
Also, until this level of repeat purchase was reached, customers usually only had small basket sizes. ASDA. com was trying to encourage customers to purchase more than a ? 74 basket size on average. Another major problem was that a lot of the customers had a tendency to “dip-in”, shop once and never come back. Doug Cliffe, general manager for e-commerce at ASDA in 2003 explained: It could be that they dip in to try it out, it was fine but “I’m just as easy to get in the car and nip to the supermarket rather than spending 40 min trying to build a shopping list, it’s equivalent to a day out. (ASDA’s general manager for e-commerce) Enhancing the Efficiency of the Picking Process and Increasing Service Levels As explained by a contact at ASDA. om, one of the biggest resource utilizations in conducting online home-shopping business was related to the in-store operation of fulfilling customer orders. Tied into this issue were two problems with ASDA’s in-store fulfillment systems and processes. First was lack of integration between shop-floor systems and the picking operation. This meant that double scanning was necessary during the picking process, first to the palm pilot to ensure that the goods were correct and second to the EPOS (Electronic Point of Sales or cashier) to connect to the shop’s SMART system. This was very wasteful of time and efficiency (an extra 15 minutes was wasted per order).
Second, the handheld terminals held by pickers worked with batch processes, where pickers needed to go back into the warehouse every time to connect the palm pilot to the PC to download the completed picking task and get the next batch of orders. These trips back and forth from the shop floor to the warehouse were time consuming and inefficient. Therefore, in 2004, the company was planning some initiatives which will help increase the efficiency of in-store fulfillment. Online Propositions ASDA. com has proved strengths in non-food offerings, especially white goods and general merchandise, but was facing challenges to transfer these strengths online. Picking practices and supporting fulfillment devices (such as the tote and vans) were not geared up to deliver large white goods.
The company had the ability to offer them cheaper than other retailers, and the Internet was an appropriate medium for the sale of these types of products. Therefore, if the company could create an efficient way of Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. 76 International Journal of Cases on Electronic Commerce, 1(2), 57-78, April-June 2005 delivering them, they would capture a better online market share. In addition, the company also faced the challenge of expanding its current range of online offering (a competitor could offer 30,000 to 40,000 lines of grocery goods plus many non-food goods).
In building its online proposition, the company also faced the problem of providing information content for its food products as consumers were increasingly critical and wanted better knowledge of what they were eating. Geographical Expansion An important problem faced by ASDA. com was geographical coverage. With its latest expansion costing ? 3 million in August 2004, the service only covered 40% of the UK population (based on 53 stores nationwide). Therefore, 60% of the population was not reached. Nevertheless, as explained before, ASDA. com wanted to ensure that the existing in-store operations could achieve operational benefit before it expanded nationally. ACKNOWLEDGMENTS This case would not have been possible without the cooperation of the Information Services Division of ASDA Stores Ltd.
Interviews were conducted in 2003 with WalMart Europe ISD director, general manager for e-commerce, head of ISD infrastructure, and ISD systems manager for MIS. The authors would also like to express their gratitude to Andy Haywood, ASDA’s ISD director, for the permission to publish this case and Andrew Pattinson, ASDA’s ISD project manager, for facilitating it. REFERENCES BBC. (2003). ASDA overtakes Sainsbury’s. Retrieved January 2, 2005: http:// news. bbc. co. uk/1/hi/business/3112689. stm Boyer, K. K. , & Frohlich, M. (2002). Ocado: An alternative way to bridge the last mile in grocery home delivery. European Case Clearing House Collection (Vol. 602057-1, pp. 1-19).
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Best practice in supply chain management: The experience of the retail sector. European Journal of Innovation Management, 1(2), 58-66. Irene Yousept is currently a full-time PhD researcher at the University of Newcastle upon Tyne Business School, UK, funded by the Overseas Research Scholarship. She holds a BEng (Honors) with cum laude in industrial engineering from the University of Trisakti, Indonesia, and an MSc with distinction in business IT systems from the University of Strathclyde, UK. She was a teaching assistant for e-business module. Her research interests include emerging business models and strategies in the information economy, particularly in retail banking and supermarkets.
Miss Yousept has worked closely with UK leading companies in banking and retailing. She has been a reviewer for a number of journals and conferences. Her recent work in Internet banking has won the best paper prize in e-business and technology management in British Academy of Management (BAM) Conference. Feng Li is chair of e-business at the University of Newcastle upon Tyne Business School, UK. His research has focused on the interactions between information systems and emerging strategies, business models, and organizational designs. He is the author of two books and numerous journal articles, and he speaks regularly at international conferences and to business executives from both the private and public sectors.
Professor Li is a member of several programs on ICTs, e-commerce/e-business, supply chain/value chain, and virtual teams. He has worked closely with companies in banking, telecommunications, manufacturing, retailing, electronics as well as the public sectors. He is the e-business SIG chair in British Academy of Management (BAM). His recent works on Internet banking and on telecommunications pricing models and value networks have been extensively reported by the media. Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.