E-grocers square up for food fight
Tesco last week reported excellent earnings, but Waitrose-backed Ocado is ramping up its challenge in an online grocery battle that will be closely watched by other web-based retailers.
Online sales remain a tiny fraction of Tesco’s business but the growth curve is sharp. Tesco.com sales for the year ending 23 February grew by 50% to £356m and the operation is profitable with the exception of US startup costs. But the internet division represents just 1.5% of Tesco’s business.
While the supermarket chain dominates UK online groceries, it is about to see more competition from Ocado, which from next month will begin offering its service in London after completing a pilot covering 340,000 households in the Hertfordshire area.
Ocado is taking a contrary approach to Tesco, with plans to use a centralised distribution centre. In the next few months, Ocado will move from its 50,000-square foot plant in Hemel Hempstead to a facility six times larger in Hatfield.
Tesco’s decision to distribute from local supermarkets has been seen as a successful tactic, but Ocado is convinced that centralised depots are necessary.
‘The others are adding an e-channel to existing channels but we’re online-only and the only scalable solution is warehouses, or else you get in the way of shoppers at stores,’ said Roger Whiteside, joint managing director of Ocado.
The company believes it has learned lessons from the pioneers. The distribution centre provides a shorter supply chain, which means that goods are fresher and buyers know what is in stock, it argues.
One-hour delivery slots are also available, the £5 delivery charge is waived on orders of over £75, and delivery staff are equipped with satellite navigation systems for a more efficient service.
Experts believe that whether distribution centres or in-store picking is best depends primarily on local demand.
Steven Buckley, marketing director of warehouse management software developer EXE Technologies, which supplies grocers including Tesco and Ocado, said: ‘Distribution centres work well in densely populated places like London, Manchester or Hong Kong.
‘Tesco has gone for the cheapest way to grab market share but it’s already frustrating store shoppers when the pickers are in their way.
‘I believe Tesco will go the distribution centre way in the end, but there will be a mixture of strategies for geographies. Sainsbury’s already has large and small distribution centres and two variations on store picking.’