‘Tesco would be reckless to rival Amazon on free deliveries’

Just three weeks after the etail titan unveiled plans to offer free Amazon Fresh deliveries for Prime members, Tesco boss Dave Lewis says he sees an “opportunity” of his own in that area.  

The trouble is that opportunity could actually end up being Amazon’s.   

“Add free home grocery deliveries into the mix and Tesco would be giving away an awful lot of margin in order to keep customers out of Amazon’s clutches”

The biggest draw of Clubcard Plus when Tesco launched it in November was the 10% off two ‘big shops’ that it offered members every month, up to the value of £20 per shop.

It was a clever strategy that appeared designed to lure more of Tesco’s loyal customers back into stores and away from online – a channel that has proved notoriously difficult for the grocers to run at a profit.

But now Lewis has suggested that free online deliveries could be added to Clubcard Plus in a bid to better compete with Amazon’s fulfilment offer. It is a move Tesco could live to regret.

Knee-jerk reaction

I should caveat this by saying that I am a Clubcard Plus member. I am still ‘old school’ in the way I shop for food in large supermarkets and, particularly during the pandemic when weekly bills often swelled to three figures, £7.99 seemed a price worth paying to get 10% off two such shops.

With two £100 shops a month on Clubcard Plus, members have already more than doubled their money, saving themselves £20. That’s without considering any of the other benefits Plus offers, such as discounts on F&F clothing and double data for pay-monthly Tesco Mobile customers.

Add free home grocery deliveries into the mix and Tesco would be giving away an awful lot of margin in order to keep customers out of Amazon’s clutches.   

“If it really was the direction of travel from the outset, as Lewis suggests, free deliveries should have been a central part of Clubcard Plus at launch”

I suspect there will have been a few staff at Amazon HQ rubbing their hands over the weekend when they read Lewis’ suggestions in The Sunday Telegraph.

“The idea of Prime is very similar to where we are in Clubcard Plus in terms of bringing a whole bunch of benefits together,” Lewis said. “An opportunity into the future for us is to think about how we put delivery into Clubcard Plus.”

He insisted that has “always been the direction of travel” for the membership scheme, but it certainly feels more like a knee-jerk reaction to Amazon’s latest grocery salvo.

If it really was the direction of travel from the outset, as Lewis suggests, free deliveries should have been a central part of Clubcard Plus at launch, perhaps offset by a slightly larger monthly fee. Including them in the future, and holding the monthly subscription cost at £7.99 a month, could prove profit destructive if it drives existing Plus members, like me, online and away from stores.

Race to the bottom

Mission accomplished for Amazon, perhaps?

The online titan knew its move to offer free grocery deliveries to its Prime members would crank up the pressure on its mainstream food retail rivals in the UK. 

It knew that, by offering home delivery at no extra charge for Prime members, it could turn the heads of even the most loyal Tesco, Sainsbury’s, Asda and Ocado shoppers. 

It knew that those retailers would be forced to consider strategic ripostes if they were to protect market shares. But any response from Lewis and his UK grocery counterparts is likely to further impact already wafter-thin online grocery margins. 

Ocado once said it cost around 11% of every online grocery order to deliver it from warehouse to a customer’s home. 

“Offering shoppers unlimited deliveries, alongside the slew of existing discounts and benefits, for just £7.99 a month, could be reckless”

Apply that percentage – there will no doubt be a bit of give and take either side – to Tesco’s current delivery fees: the grocer charges £5.50 for customers to secure a one-hour delivery window or £3 for a four-hour ‘flexi-saver’ slot. 

At the levels of cost Ocado alluded to, that means customers paying Tesco £5.50 for a delivery are, in effect, only covering the costs associated for the first £50 of their order to be delivered to them. At £3, they are only paying Tesco to deliver £27.27 of the goods they have ordered to their doorsteps.

For Tesco, offering shoppers unlimited deliveries, alongside the slew of existing discounts and benefits, for just £7.99 a month, could be reckless. Amazon can afford to do it – it doesn’t need to make a profit from its retail operations in the UK. Tesco does. 

Once upon a time, Tesco could have argued that taking a hit on delivery costs was a price worth paying to secure market share online. 

But at a time when ecommerce sales have boomed during the pandemic, the long-term play to grab market share now and think about profitability later can surely no longer apply. The grocers have to start thinking now, and thinking very seriously, about how they turn a sustainable profit from ecommerce.

Attempting to rival Amazon’s cheap fulfilment proposition is not the way to do it.