In part three of the just-food management briefing on online food retail, Glynn Davis provides examples of some of the more notable ventures in the sector – from Tesco and Ocado in the UK to Migros Group in Switzerland and FreshDirect in the US.

1. Tesco

The largest UK retailer was a pioneer of online grocery retailing. It began a store-pick home delivery service from a single store in west London in the late 1990s at a time when few people had internet access. It is now the largest online grocer in the world with food sales of around GBP1.6bn (US$2.6bn) in 2009.

Having utilised the store picking model for many years, the company has more recently opened a number of dark stores in heavily-populated areas where the volumes justify the capital expenditure on building a unit dedicated to only online orders. All orders are fulfilled via the company’s own fleet of vans.

The service has grown to have over 1m active customers, all of whom have to be a member of the grocer’s Clubcard loyalty programme. This link has proven to be a great help in growing online sales as Tesco offers online-only discounts and uses the information it holds on its customers’ behaviour and spending habits to tempt them to make their weekly/monthly shop online. 

There is no doubt that Tesco is over time moving towards the dedicated warehouse model. Its dark stores are financially sound as evidenced by its Aylesford online-only store that generates revenues of GBP1m per week and is profitable – even though it is understood to have the capacity to handle orders worth GBP3m per week. The plan is to add 10 more of these stores to its existing three by 2015.

2. FreshDirect

Learning from the failures of Webvan, FreshDirect began operating in 2002 in New York City and has grown into a business that reached profitability in 2008. Its sales stood at US$250m in 2009.

FreshDirect’s success has been based on its customer-centric model that involves communicating regularly with its database of 250,000 customers, with recommendations and cross-selling that can bump up average order sizes by 10% on their weekly shop.

This combined, with its competitive pricing, focus on convenience and fresh foods, and the utilisation of extremely large vans to achieve a critical mass for deliveries have put the company in a position to consider expanding beyond New York.   

FreshDirect has not gone unnoticed outside the US and UK supermarket chain Morrisons bought a 10% stake in the company for $50m in March as a precursor to its own entry into the online grocery market in 2013. 

Morrisons chief executive Dalton Philips has stated that the UK retailers is “learning tons from them – about assortment, service, fulfilment and marketing” and believes this will enable the company to “leapfrog”  its competitors in the UK.

3. LeShop

The online operation of Swiss retailer Migros launched in 1998 and has been profitable since 2006. In the first half of 2010, it achieved sales of CHF75.4m (US$93m) – of which mobile commerce represents an impressive 10%.

The model of delivering to the home works well for LeShop as it taps into an affluent customer base in Switzerland. Around 40,000 customers shop at least once a month with the retailer and of these 20,000 order every three weeks and accrue a basket worth over EUR140 (US$201) each time. 

On average, the company fulfils 3,000 orders per day with around 50 items in each basket. It does not offer same-day delivery as it prefers to handle weekly shops as this reduces its logistics costs.

The fulfilment infrastructure involves two distribution depots and relies on the Swiss Postal Service to make deliveries in the evenings. 

4. Ocado

This globally unique retailer has no stores of its own and operates a fully-automated dedicated warehouse with home delivery. Without a store base, Will Treasure, director of operations and technology, Javelin Group, says Ocado delivers as far as 150 miles from its dedicated warehouse in Hertfordshire, which fulfils around 90,000 orders per week.

Ocado continues to divide opinion among industry watchers, with supporters’ belief affirmed by the first-half profit it recently reported, while others argue that its model is fundamentally flawed.

Such is the nature of the delicate balance of costs that if the delivery distances could all be kept under 80 miles then Treasure suggests the model could work. “It is a problem as the transport costs are so high,” he adds, although this is mitigated to some extent by Ocado’s van bodies being removable. Batches of them are distributed by articulated lorry to six hubs around the UK for more cost-efficient ‘last-mile’ delivery. 

The flotation of Ocado last year generated funds for the business to invest in a second warehouse that will be operational by the end of 2012.

Despite some of the concerns for the model, Jamie Trust, senior business analyst at grocery experts IGD, says Ocado performs well “because the model is unique”.

“It provides new ways to service online shoppers,” he adds. “It’s best in class in the UK and so the business will continue to perform well despite the move towards a multi-channel model [by many retailers].”

For more of this just-food management briefing, click here.