Who's the fastest-growing grocery retailer right now? Aldi? Lidl? Iceland? Wrong. Right now it's probably Ocado, a retailer of premium-price Waitrose goods, with sales up 30% in the first quarter and 25% year-on-year.
With online grocery sales up a whopping 35% overall (see p4), it's clear online isn't just an alternative delivery model any more. It's a £3bn market, and with the MySpace generation online it can only get bigger.
In another sign of its maturity as a market, Ocado even made a profit last year, albeit a very small one (£1m), and albeit before a not inconsiderable bill for depreciation and amortisation.
But it's the decision to undercut Waitrose on price that really confirms the viability of the Ocado model. For the last year it's been matching Tesco on price on 5,000 branded items. Last weekend, however, it announced it would be turning its attention to Waitrose own-label goods, with plans to undercut its Bracknell partner by as much as 10%.
This move wasn't designed to rile Waitrose (though it did seem odd that Waitrose announced plans to scrap delivery charges the next day). It simply reflected the fact that, like any web model that is working properly, it has lower operating costs, and can therefore price its products accordingly.
What's more, as it adds scale, Ocado can increase exponentially its price differential against Waitrose - or its profitability: currently running its Hatfield operation at less than 50% of capacity, Ocado estimates it can improve profits by £70m simply by doubling turnover to £870m. This would take profit margins close to 10% - more than even Tesco.
Of course, none of this is guaranteed. But it does seem odd that Waitrose and JLP seem to be competing rather than complementing - and just as Ocado hits its stride.
With online grocery sales up a whopping 35% overall (see p4), it's clear online isn't just an alternative delivery model any more. It's a £3bn market, and with the MySpace generation online it can only get bigger.
In another sign of its maturity as a market, Ocado even made a profit last year, albeit a very small one (£1m), and albeit before a not inconsiderable bill for depreciation and amortisation.
But it's the decision to undercut Waitrose on price that really confirms the viability of the Ocado model. For the last year it's been matching Tesco on price on 5,000 branded items. Last weekend, however, it announced it would be turning its attention to Waitrose own-label goods, with plans to undercut its Bracknell partner by as much as 10%.
This move wasn't designed to rile Waitrose (though it did seem odd that Waitrose announced plans to scrap delivery charges the next day). It simply reflected the fact that, like any web model that is working properly, it has lower operating costs, and can therefore price its products accordingly.
What's more, as it adds scale, Ocado can increase exponentially its price differential against Waitrose - or its profitability: currently running its Hatfield operation at less than 50% of capacity, Ocado estimates it can improve profits by £70m simply by doubling turnover to £870m. This would take profit margins close to 10% - more than even Tesco.
Of course, none of this is guaranteed. But it does seem odd that Waitrose and JLP seem to be competing rather than complementing - and just as Ocado hits its stride.
No comments yet