A recent 25-year deal between supermarket chain Morrison (Wm) Supermarkets and online grocer Ocado Group PLC (LON:OCDO) offers a glimpse of how this area of the grocery business is attracting more and more customers looking for a more convenient way of shopping.
According to Reuters, after the deal was announced, shares of both companies responded positively on the London Stock Exchange — Morrison’s stock rose 2% and Ocado Group PLC (LON:OCDO)’s shares rose 47%. The deal helps Morrison tap into the online grocery market, an area that rivals like Tesco Corporation (USA) (NASDAQ:TESO) and J Sainsbury plc (LON:SBRY) are succeeding in.
Tesco’s business model
Tesco’s online shopping service began in 1997 and has grown to about $3.03 billion in annual sales. The company’s success in the U.K. market prompted it to launch online grocery shopping in South Korea, Ireland, and the Czech Republic. Tesco Corporation (USA) (NASDAQ:TESO)’s model offers the customer flexibility with its “Click & Collect” service that allows orders to be placed online and picked up at a local store.
Click & Collect for grocery items is currently available in 45 stores and the number is expected to increase. Tesco Corporation (USA) (NASDAQ:TESO) also uses uses four centralized “dotcom-only stores” that fulfill over 80% of London orders when demand is high. According to the company’s website, one of Tesco Corporation (USA) (NASDAQ:TESO)’s key performance indicators for 2012 showed an increase of 10% in U.K. online sales; grocery is considered the largest of their online businesses, and it “accelerated its already strong growth through the year.” Tesco Corporation (USA) (NASDAQ:TESO) plans to grow its online business in all markets and provide customers with multiple channels that enable them to shop at a store or via computer or mobile device.
J. Sainsbury’s success story
Another British grocer is J Sainsbury plc (LON:SBRY), currently ranked second in online grocery sales and considered the fastest growing online grocer in the U.K. Sainsbury’s grocery business is rapidly growing with annual sales rising 20% and weekly orders that surpassed 165,000 during 2012.
According to the company’s website, its online grocery orders generate nearly $1.2 billion in sales and the online business is considered a major part of the company’s growth strategy. J Sainsbury plc (LON:SBRY) finds the multi-channel strategy to be a profitable one because customers that shop both in-store and online spend more than customers who only shop in-store.
Deal promising for Morrison and Ocado
According to Reuters, Morrison had some misgivings on the profitability of the business deal due to the fact that Ocado has been in business for ten years and has yet to earn a profit. According to Reuters, skeptics believe that Ocado’s business model of filling orders from a central distribution center won’t be as profitable as Tesco’s or J Sainsbury plc (LON:SBRY)’s.
