Ocado’s decision to launch a price comparison campaign against rival and retail giant Tesco has been met with confusion and surprise by some analysts, one of whom suggests the UK online retailer could be hastening its demise with the move.
The offensive, which will run as a trial in the north-west of England, is an extension of Ocado’s existing Tesco Price Match scheme and pledges to beat the price of all comparable shopping baskets at the UK’s largest retailer.
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A spokesperson for Ocado told just-food yesterday the campaign has been launched “to offer a cheaper proposition than supermarket rivals and therefore encourage higher levels of growth”.
Shore Capital analyst Clive Black, however, believes the proposition is an “interesting” one, given Ocado’s premium positioning.
“Ocado stands to our minds as a distributor of Waitrose products and although Waitrose is increasingly a mass-market player, it is still very much at the premium end of the market. So to suggest that Ocado can become a mainstream player is almost suicidal,” he tells just-food.
Black suggests the decision to make a move on Tesco may not have been the right one, given the retailers’ expansive value proposition.
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By GlobalData“It suggests they’re not self-confident enough in their premium product proposition and they think they’ve got a conceptual problem in terms of value. To suggest that an Ocado basket is going to be the same price value as a Tesco basket is stretching credibility to our mind.
Black says Ocado is competing against Tesco’s private label offering, its branded promotions that “even Sainsbury’s can’t match”, its Clubcard scheme and its fuel promotions, an area Ocado does not operate in.
The north west of England is an area dominated by its major rivals and deep discounters like Lidl and Aldi and Black argues Ocado is “largely irrelevant” in the region.
“Ocado’s offer, not because of its mix, is a million miles from price value in Manchester, because Asda, Morrisons, Tesco, Aldi and Lidl dominate that market and Ocado just doesn’t feature,” Black says.
With economic confidence among consumers still relatively low in the UK, retailers are increasingly using vouchers, couponing and promotions as a way of capturing a greater share in the competitive retail market.
But if Ocado is hoping to capture a share of the mass retail market, it will undoubtedly have to spend money – and its recent financial results have hardly made for wholly positive reading.
In June, the retailer revealed mixed half-year results, with sales up, flat pre-tax profits and a fall in operating profit.
While some analysts tried to look for positives, the numbers were described as “poor” in some quarters in the City, with another Shore Capital analyst Darren Shirley suggesting “it will remain some years” before Ocado will deliver meaningful profits, “should that outcome ever occur”.
Black reiterated his colleague’s comments today. “Ocado is barely profitable at the moment. It is consuming cash as it develops its second customer fulfilment centre and to cut its gross margins to try and get incremental sales suggests that existing business doesn’t work and it needs to take other steps, that won’t work, to try and survive to our minds.”
June’s results were the latest stumble on a long and exhausting path for Ocado which is having to face better service propositions from competitors, a slowdown in spending and consumer perceptions on price.
Panmure Gordon analyst Philip Dorgan questions Ocado’s performance in comparison to its rivals.
“They think they are the lowest cost operator and therefore they believe they can be cheaper than anyone else and that’s just rubbish. The numbers show they’re under-performing against their multi-channel competitors and you have to question why. Why are they growing at 11-12%? Sainsbury’s is growing at over 20%, Asda is growing at over 20%, Waitrose at about 30%, Tesco don’t give a quarterly number but it’s faster than Ocado’s.”
Dorgan suggests the reason for Ocado’s under-performance is down to its competitors’ success.
“The reason they are under-performing is because the other guys are getting better at what they do. Tesco has narrowed its delivery window to an hour … they’ve invest a lot of money in [online], they’re bigger and better and in the long run they’re going to be tough competitors. It’s good to try different things [but] I don’t think it’s going to make any difference. At the end of the day their sales are under-performing, they’re getting close to breaking covenants and the reason why sales are under-performing is because they are against tough competitors in a market where there is no tipping point.”
Black is less confident and suggests the group may have to ask shareholders for further funds if it is to keep operating and indeed expanding. He questions whether Ocado is competing head-to-head with Tesco or whether at the premium end of the market the retailer is attempting to share growth from dot.com retailers such as Waitrose and M&S.
“A national roll-out is going to be expensive and you’ve got to ask the question, are they confusing what the Ocado offer stands for? As far as I’m concerned, if Ocado moves into mainstream territory … it has signed its own funeral.”
