The Online Grocery Revolution
The Online Grocery Revolution
Visit one of the offices of the UK’s big Retailers, take a moment and listen to the various commercial conversations and you will find that a major buzzword that is used more and more, particularly when discussing future strategy is ‘online.’
Looking at where the UK’s major retailers are individually in terms of online presence: Tesco are as with their overall UK position, the biggest in this arena and are looking to grow this channel’s contribution (one of the first significant decisions that Phillip Clarke (Tesco’s new CEO) made was to purchase Blinkbox – the online Video platform). Overall, Tesco is showing a healthy online performance of around +11% YOY, an area outlined in its strategy is one its six key priorities (it now commits 15% of all its investment into technology). Sainsbury’s Internet sales have neared £1bn recently and with growth of nearly 20% YOY, online is a key part of their overall strategy in trading as a multi-channel retailer (Source: Sainsburys). Asda also sees online as an important part of their UK operations, hiring the consultancy McKinsey & Co to look at the grocer’s overall strategy, with sales from the web likely to be a key feature.
The last of the top 4, Morrisons announced a tie up with Ocado a couple of weeks ago to trade online, which is the culmination of a plan that has been at least 2 years in the making. Firstly, this plan involved purchasing a stake in a US online retailer ‘to understand how it’s done;’ and then came the purchase of Kiddicare, the online baby retailer; now finally Ocado. But is this all too late or has Dalton Phillips (Morrison’s CEO) steered the supermarket skilfully into an important Grocery arena?
It is clear, it is now essential if they wish to remain a serious future contender, Morrisons has to have a strong online presence, as one in five UK families now purchase groceries online, a figure which is growing 3 times faster than in-store (Kantar Worldpanel). Why then did city analysts greet the announcement with a luke-warm reception, Morrison’s shares only rising by 1%? There are several answers to this question: firstly Morrisons have said they will not make any profit before 2017, whilst other Grocers already have established platforms and will grow over that period already earning profits; secondly impact on turnover will also be negligible over the next 2 years, so no balance sheet advantages there; finally whilst online is set to grow, this deal would give them 10% of the market if they were trading at full capacity now, in 3 years or so this will have shrunk to 5%, significantly behind market share.
It is important then, for Morrisons to get it right - so what are the positives? Firstly it will be a Morrisons van (not an Ocado van) driving Morrisons products, re-enforcing their credentials with consumers; secondly in my opinion, Morrisons has a strong USP with its fresh offering via ‘Market Street’ – this is surely a chance to spread the word; next with its integrated supply chain Morrisons also have the opportunity to keep costs to a minimum; finally Morrisons also have potential routes to the US, and an established baby retailer. They will need to get the basics right as a minimum though: Free Delivery / Delivery slots, Substitutes and Money Off Incentives are all identified as important to online shoppers (IGD).
A final note about Ocado who received a much better reception (shares +36%); with a deal worth £165m upfront, an IT service fee, share of Morrisons.com profits, contribution to R&D and ½ the capacity of new depots utilised. They will have to watch out on their relationship with Waitrose though, who are not happy and have lawyers studying the deal carefully for any breach of contract.
Dave Marston - Category Wins