The purely online retailer said it made an underlying pre-tax profit of £7.5m in the 24 weeks to May 18, against a £1m loss for the same period last year, helped by its joint venture with Morrisons.
However, there remains a big question around whether online grocery retailing is actually profitable, given the high costs associated with delivering food stuffs to customers’ homes. Until its deal with Ocado, which has been running since last year, Morrisons had shied away from offering an internet-based service. Indeed, it has taken Ocado itself over a decade to move into profit.
There are also questions about the online operations of some of the other major grocery operators, who do not always provide clear profit breakdowns or costs associated with online, such as staff or property costs. They say that online is profitable, but it is difficult to analyse whether this is the case.
Typically, the major grocery operators will charge up to £5 for home delivery (sometimes as little as £1 and free above a certain level), while the actual cost of packing and delivering is considered by some analysts to be much higher in the region of £12-15, effectively making home delivery an unsustainable loss-leading service as retailers battle for market share. Yet it is the amount of retail space the retailers have opened which is seen as the main cause of their demise.
Whilst there is no doubt all of the big four have been caught out opening large stores when there was little remaining capacity or indeed to protect existing catchments, the fact is that what they do best – or what works best – is when customers come to their store, buy their groceries at the check-out and then take them away.
So, which way forward for the big four? Much is being made of their loss of market share to the discounters – who lack and have no intention of creating an online platform. They seem trapped into persevering with online delivery, whilst going head to head on value with the discounters, with their margins being eroded at both ends.
Multi-channel retail is clearly seen as the answer. Given that the vast majority of customers would be unlikely to accept a significant increase in delivery costs, our view is that home delivery will begin to decline in favour of click and collect, perhaps to an exclusive service for the few willing or able to pay an appropriate cost. Click and collect offers retailers not only a service opportunity but the chance to reduce delivery costs, notably the costs incurred when a customer is not at home. All the major players now offering a click and collect service in-store and an increasing number of shoppers are using it.
Tesco’s latest figures bear this out, with click and collect now accounting for 6% of online grocery sales and 70% of online general merchandise sales. Overall online grocery sales also continue to rise, with the UK’s biggest retailer recording an 11% increase in online grocery sales and a 25% increase in sales of online general merchandise – despite a 3.1% fall in sales at its large format stores.
For the foreseeable future, the continued steady growth of click and collect is therefore assured, not only in-store but in other locations such as rail and tube stations, where all the major grocery operators are trialling a service. It is not necessarily the end of larger stores, as there are still gaps where new stores can be supported. Furthermore, they are now more affordable given the more limited competition for sites and all they need to do is beat the next most valuable land use. Rentals for new large stores in and outside of the M25 are now significantly lower than the height of the market in 2012. This ought to be an opportunity to improve market share.