Saturday, 4 July 2015

Online Grocery Shopping - Pointers to Making a Profit But no Easy Answers

Half year results from Ocado, the company which only sells groceries on line, show that profit before tax fell to £7.2m compared with £7.6m this time last year. The decline is attributed to paying off interest on debt and accounting for depreciation charges.  CEO Tim Steiner confirmed once again that he is not particularly bothered about short term numbers.

This lacklustre profit performance comes despite a 15% sales increase, which makes Ocado one of the front runners when it comes to generating growth.  Tesco is growing by about 11% and Sainsbury by 6%.

So if revenue growth alone is not enough to generate profits, what might?

The ability to offer high price high margin lines alongside more basic products is key. The heavy intrinsic costs of running an online business (capital spend, delivery and picking costs, website maintenance) mean that online will not work on a low margin mix.

A high market share in densely populated areas helps, as it avoids delivery vans having to drive miles between customers. This could explain why supermarkets offer very generous money off incentives to use their online service, and have substantially reduced charges for home delivery.

Cost efficiency is vital. Some supermarkets pick orders in their stores, but there is a trend to building  “dark stores”, which are purpose built fully automated warehouses, and considered by many to be a lower cost method of operating. Ocado, having no stores, has operated like this since the start. Indeed it feels that its proprietary technology is so cost efficient that supermarkets will pay to have access to it. They already have a partnership with Morrisons, and are rumoured to be on the point of signing up another company.

Even when assembling orders is done in store there are opportunities for continuous cost improvement. A recent survey found that best in class order assemblers are three times faster than the worst.

Click and Collect has been viewed as a further way of saving cost, as a separate fleet of vans is not required. However, John Lewis’s announcement this week that they will charge £2 for Click and Collect orders under £30 illustrates that even this mighty retailer  finds it challenging to make an acceptable return.

All of which suggests that there is no easy path to online profitability. Indeed Andy Street, CEO of John Lewis when announcing the new charge reportedly said that many web based business models have become “unsustainable and “bonkers”. Words probably worth remembering.