Why the world's largest online grocer has gone into hiding

With annual online grocery sales of around £3.5bn in the UK alone, Tesco Plc remains the world’s biggest online grocer, ahead of Amazon and Walmart. However, at Tesco’s latest interim results presentation last week, for the first time in over a decade there was not a single mention or question regarding this part of its business, aside from the fact that it grew by 3.5% - which is broadly inline with Tesco’s offline grocery sales.

The obvious reason for this silence, which contrasts sharply with all the noise US grocers are making about their burgeoning e-commerce growth, is that market leader Tesco finds itself stuck firmly between the rock of negative profit impact and the hard place of losing market share to pure online grocers.

Three years ago Tesco’s online grocery sales were still rising by nearly 15% and its share of the online market was around 38% (vs 28% offline). The slowdown is the result of a conscious decision Tesco has taken to try to improve the profitability - or more precisely, to reduce the burden of maintaining - its online grocery business over the last couple of years by raising minimum order values and service fees. Its two largest competitors, Sainsbury and Asda, have followed Tesco’s lead.

At the same time however, pure online grocer Ocado has opened two new fulfillment centres and maintained an aggressive marketing campaign to lure new shoppers with discounts and free delivery, resulting in continued double-digit retail sales growth. Amazon has also been rolling out its Fresh and Prime Now free same day grocery delivery service in major UK cities, aided by a wholesale agreement with Morrisons, the UK’s fourth largest (and most vertically integrated) food retailer.

Tesco’s decision to prioritize profits over online market share (its loss-making Tesco Direct online general merchandise business was shut down in July this year) is effectively a bet that the pure online grocers’ growth will hit a natural saturation barrier sooner rather than later - i.e., before it starts seriously affecting in-store sales.

As the online grocery space race gathers pace in the US, it’s worth reflecting on the fact that the largest online grocer in the UK, where penetration is still approximately double that in the US, has chosen to de-emphasise this part of its business by adopting such a potentially risky wait-and-see attitude.

A sign perhaps that some of the energy currently being expended on gaining first-mover “advantage” by copying existing fulfillment strategies should be diverted to testing truly novel ways to integrate offline and online more effectively and profitably.

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