Morrisons may have come to the ecommerce party late but it is making up for lost time. However, is the online cake big enough to go round and is there any money in it?
Why are we talking about it now?
A hot topic for some time, last week brought renewed excitement when Morrisons - the only one of the big four grocers not to sell food online - paid £32m for a 10% stake in New York-based food etailer FreshDirect.
Morrisons chief executive Dalton Philips will sit on FreshDirect’s board and the retailer said the deal will allow Morrisons to “learn about its profitable ecommerce model” in advance of launching its own offer in the UK.
How big is the online food retail market?
At the end of last year it was worth £4.8bn, according to grocery industry body IGD. The figure is expected to double by 2015, when it is likely to account for 5.4% of UK grocery spend compared with 3.2% now. Online food sales are rising faster than any other grocery channel and climbed 21.4% last year alone.
But does anybody make any money?
That’s been the bugbear so far. In its last financial year, Tesco.com, which sells groceries - as well as other products - to about 1 million active customers, posted a 26%
rise in profits to £136m on sales up 14% to £2.1bn. However, some argue that the way Tesco accounts for its dotcom arm means that a chunky proportion of the costs are borne by stores so the profit performance is not as high as reflected and not really comparable with an online-only business such as Ocado.
Profitability was at the heart of the debate ahead of Ocado’s IPO last year. Although profitable at the EBITDA level, Ocado has yet to make a full-year pre-tax profit. However, its fans believe Ocado’s creation of a bespoke distribution system based on state-of-the art technology, cutting the costs associated with other online food distribution models, will increasingly bring financial returns as the business expands.
Will the digital food retailing end up like the high street, dominated by the biggest companies?
While out in front, the big grocers do not necessarily have the market sewn up. The IGD research showed that 27% of food and grocery manufacturers would consider running their own online shops to sell straight to consumers. 43% of manufacturers expect up to 10% of their total sales to be through the online channel by 2015.
IGD chief executive Joanne Denney-Finch says: “The growth predicted for online grocery presents an opportunity for companies of all sizes and types - retailers, manufacturers, local producers - to meet the needs of today’s multichannel shopper.”
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