John Lewis is to invest a further GBP11 million in food eTailer Ocado.

Ocado, which trades under John Lewis' Waitrose supermarket brand name, hopes to capture some of the 5.4% of total grocery sales expected online by 2005. But Waitrose may find it hard to challenge Tesco's enormous success in the market, especially as it has opted for expensive independent warehouses in contrast to Tesco's cheaper in-store picking.

Internet food retailer Ocado has received a further GBP11 million from the John Lewis Partnership as part of a GBP46 million ($64.5 million) fund-raising initiative. This cash injection ensures John Lewis maintains its 40% equity stake in Ocado. Using John Lewis's Waitrose brand name, Ocado expects to launch in London later this year and anticipates nationwide rollout within five years.

For Waitrose, the deal offers the opportunity to expand beyond its Waitrose@work office delivery operation and establish the brand beyond southern England without building new stores. However, the premium supermarket chain must first overcome numerous hurdles if it hopes to overtake UK market leader, Tesco.

The UK has the most developed online grocery retailing market in Europe, valued at $580 million. Last year was a watershed, with Tesco expanding its reach to 90% of the UK population and diversifying into new product areas. The online operation is now the world's biggest online grocer, with 2000 sales of $326.4 million.

Archrival Sainsbury's is keen to catch up, building the world's second largest fulfillment center, with further competition coming from Asda Wal-Mart. At the same time, smaller players such as Somerfield and Budgen have dropped out of the online market after failing to build a critical mass of customers.

The major dilemma for online grocery retailers comes in choosing between in-store picking and building independent warehouses. Despite concerns of disrupting store efficiency, Tesco's success has come through picking from existing stores. It believes that independent warehouses need to generate 100,000 orders a week to be financially worthwhile.

Ocado, in contrast, is building a large distribution center in Hatfield, which it says will serve London initially, but will eventually serve the whole of the southeast. The John Lewis Partnership has now invested over GBP45 million in Octado, which is more than Sainsbury's has spent. It will need to capture a reasonable proportion of the expected 5.4% of total grocery sales expected online by 2005 to see a return on this investment.

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