Blog: Dean BestOcado shines but manufacturers see problems with shift to online

Dean Best | 3 February 2015

Fifteen years after starting out, UK pure-play online grocer Ocado today (3 February) announced its first annual profit - and claimed the trend towards online shopping was continuing. Manufacturers are taking note and diverting more resources to the channel but are encountering challenges.

Ocado made a pre-tax profit of GBP7.2m for the year to 30 November, compared to a pre-tax loss of GBP12.5m a year earlier.

Investors waiting for substantial earnings per share will have to wait but recording an annual pre-tax profit was a notable milestone for a business that has divided the City.

Reflecting on the year, Ocado CEO Tim Steiner underlined the trend many industry watchers have been identifying.

"Channel shift towards online grocery shopping continued during the period," Steiner said. "Overall, we are well equipped to continue to lead the online grocery revolution, in the UK and overseas, as increasing numbers of customers shift away from traditional forms of retailing. We are confident that we have significant opportunities for growth in sales and shareholder value."

Ocado's results and Steiner's comment will give more fuel to analysts and consultants and indeed retailers, who have been calling on more food manufacturers to spend more time building an online strategy.

Manufacturing executives recognise the potential of the channel, which has been made clear by a new survey by EY and industry body The Consumer Goods Forum.

The survey of "42 senior executives from the world's largest consumer products and retail companies" - including representatives from Mars, Mondelez International, Nestle and PepsiCo - showed there is a growing belief that an omni-channel strategy will be a key factor in company growth.

The supply chain, however, is an issue. Over four-fifths of those surveyed argued the supply chain is "not fit for purpose for omni-channel", EY and the CGF said.

And, the survey said, unless there are changes to the supply chain, a growing omni-channel business will hit margins.

There are, the survey said, various reasons why companies struggle to make omnichannel profitable. "The sheer pace of change and mad dash to sell products online has resulted in illconsidered and irrational behaviour," an unnamed consumer goods global supply chain leader told EY and the CGF. "Many companies have accepted poor terms, with little or no visibility of how products are sold and limited collaboration between manufacturers and retailers."

EY and the CGF said companies, in a rush to develop e-commerce capabilities, companies have often bolted on systems and processes without fully considering integration with traditional store fulfillment. As a result, supply chains are inefficient and there is a lack of visibility across different channels.

"If omni-channel is driving growth but isn't profitable, the sector risks years of margin dilution," says Andrew Cosgrove, global lead analyst for consumer goods and retail at EY, said. "It is imperative that companies transform their operating models to make omnichannel work both for the consumer, but also for financial performance."

In the coming days, just-food will analyse the EY and CGF report on our insight pages.

All this is of major importance to our readers. Food and drink has lagged other categories online but Euromonitor predicts it will be the fastest-growing sector online on a CAGR basis between 2014 and 2019.

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