The U.K.’s Co-operative Group is creating a new model for online grocery shopping by using its network of convenience stores as local distribution centers.
Co-op was a late entrant into online shopping. It launched its e-commerce site on a pilot basis in March 2019, while its supermarket competitors introduced online shopping services during the 2000s. This means not only that Co-op faces heavy competition from established e-commerce sellers, but also that it must contend with regulations such as PSD2's Strong Customer Authentication (SCA) rule, which weren't a factor when its rivals first ventured online.
Because Co-op is starting from scratch, the lack of legacy e-commerce technology may turn out to be an advantage, since it can benefit from the experience that its vendors have built over the years.
“We waited a long time for the right opportunity to offer online groceries, and we wanted to work with the right eco-friendly partners. Offering e-shopping is difficult to do in a convenience store format, as we have very limited warehousing capacity in our stores," said Paul Fletcher, a Co-op solutions specialist.
Co-op has outlets in all the U.K.’s postal districts, but, unlike big-box supermarket chains such as Tesco or Sainsbury, doesn’t have large warehouses from which customers’ online orders are dispatched through a fleet of trucks. Instead, online shoppers receive their Co-op food orders from local stores, which use zero-emission electric cargo bikes for deliveries.
“We currently offer online shopping from 55 Co-op stores out of a total 2,600,” Fletcher said. “During 2020, we want to expand this to around 250 stores.”
Online shoppers can also order Co-op food products for local delivery from on-demand food delivery company Deliveroo’s website, with payments passing through Deliveroo’s system, not Co-op’s. When a shopper places an order on the Deliveroo site, they are taken to their local Co-op store to select items for purchase. During 2020, ordering via Deliveroo will be extended to 400 Co-op stores in 100 major U.K. towns.
Logistics, not technology, is the barrier to the expansion of Co-op’s online shopping service to all its physical stores.
“It’s very easy for us to turn the online shopping service on in dense urban areas such as London, Manchester, Birmingham or Edinburgh, and service those cities with our partners,” said Fletcher. “But it’s less easy to do so in more remote areas and get value from our partners, so this prevents us rolling out at a faster pace. We have to get to a critical mass in an area before we move on to another area."
Unlike supermarket chains whose trucks deliver multiple online orders in a ten-mile radius of their warehouses, Co-op’s bikes provide last-mile deliveries from the nearest Co-op store.
In terms of sales, online shopping is a success for Co-op, according to Fletcher.
“It’s certainly not cannibalizing sales, which is always a concern with online channels, and is actually growing sales,” he said. “We’re acquiring new customers such as time-conscious, urban younger consumers who are aligned with Co-op’s ethical values and are tech-savvy. These new customers are attracted to our new Gro range of plant-based vegan food.”
Co-op’s e-commerce payments gateway and fraud prevention technology are supplied by ACI Worldwide, which has been its long-term payments technology partner. The retailer uses ACI’s UP Merchant Payments Solution for its card processing operations and to secure payments through P2PE, and ACI runs a cloud-based wallet service for Co-op’s loyalty membership scheme. It also uses ACI’s mobile payments technology for its Pay-in-Aisle mobile shopping app.
“As part of our contract with ACI, they set up an e-commerce gateway for us, which bolts onto our existing POS payments stack,” said Fletcher.
Co-op has deployed ACI’s ReD Shield real-time fraud management system to prevent e-commerce fraud.
“We’ve reached a critical mass of online transactions, where we needed to put some intelligence into the fraud prevention element, and couldn’t just manually upload stolen card numbers,” Fletcher said. “ReD Shield delivers that intelligence, as it has evolved from its original version which was just a stolen card blacklist, to AI and machine-learning.”
ACI and the merchants that use ReD Shield all feed card data into ReD Shield for its machine-learning algorithms to analyze. The platform includes predictive and behavioral analytics, customized rules, and positive profiling.
“Consortium data is very important for ReD Shield,” said Andrew Quartermaine, vice president at ACI. “We reach out to third parties to give us anonymous negative data or other sources of information so we can flag suspicious transactions to merchants.”
When Co-op set up its e-commerce gateway, it had 30 stores in production initially, and is now up to 55 stores.
Currently, Co-op uses ReD Shield’s default settings, as its IT team learns how to use the system.
“It’s about getting the level of fraud detection and prevention correct, so you’re not creating false abandonment of purchases or putting cardholders’ money at risk,” Fletcher said. “As we learn about our online business channel, we’ll fine-tune the fraud prevention rules to drive the most value from ReD Shield.”
Co-op’s e-commerce site doesn’t support card-on-file payments, nor does it allow customers to use their Co-op loyalty cards. “Card-on-file is definitely a future consideration, but we need to temper that with the effects of introducing Strong Customer Authentication,” said Fletcher.
Because many European payment service providers weren’t ready to implement SCA by September 2019, as mandated by PSD2, the European Banking Authority ruled that national supervisory bodies can postpone enforcing the two-factor authentication regulation until December 31, 2020. British e-commerce merchants are
“Two-factor authentication is challenging for online grocery sites, as the value of an order could be different by the time it is picked, dispatched, and charged to the customer’s card, to the value of the original order,” said Fletcher. “The price of weighted goods may vary, or we may substitute something for an item not in stock. So, for SCA, you have to find a way to dynamically link the original pre-authorization value of the purchase with the final authorization value.”
