Is there a Fundamental Problem with the Online Grocery Industry?

Earlier this year Ocado drastically adapted the supply side of its business model by introducing branded products from Morrisons alongside their sourcing agreement with Waitrose. This decision had a positive impact for Ocado financially and diversified the risk of sourcing the majority of their products solely from Waitrose; subsequently destroying the defaming nickname ‘Waitrose on wheels’.

Ocado currently offer an inventive and greener alternative to traditional grocery shopping while focusing on increasing their core product range and improving cost efficiency. The online grocer has a business model offering grocery delivery from highly automated Customer Fulfilment Centers. Despite their operational effectiveness, the organisation has consistently made a loss from the time of its inception in 2002. Can Ocado’s historic inability to make a profit be attributed to a high cost structure and the simultaneous pursuit of competitive pricing, or is there an even more fundamental problem?CFC

The UK grocery industry is extraordinarily competitive and industries where the competitive forces are strong will experience low profits at best. In addition, there is evidence to suggest that online grocery sales don’t generate profit due to the cost of fulfilment which often outstrips the corresponding delivery charge. Operating solely online, as Ocado do, incurs high costs and demands low prices; together these forces have eroded profit margins to a degree where even Tesco, Asda and Sainsbury’s cannot make significant returns from operating online. For this reason I believe that it is essential for Ocado to command price premiums by target the premium segment of the grocery market and differentiating themselves from competition.

Following a reduction in sales growth and a reconfiguration of senior management, Ocado are now planning a major marketing strategy renovation, addressing: brand development, marketing and customer relationships. If I was at the head of this marketing strategy overhaul my solution would involve repositioning the brand and adjusting the product element of the marketing mix to address the needs of a premium market niche. I would redefine Ocado’s competitive strategy and avoid price competition by rejuvenating the brand’s premium image. Specifically, this would involve:

  • Waitrose products
  • Branded products – from Morrisons
  • Premium products – from Whole Foods and Fresh & Wild
  • Ocado premium range – from small, quality, wholesome producers

To keep the reputation benefits from the Waitrose products, Ocado should continue to nurture their relationship with the premium grocer and retain Waitrose brand products on their virtual shelves. However, if they could introduce new suppliers such as Whole Foods and Fresh & Wild and a new premium range of Ocado products, the Ocado brand could become synonymous with luxury grocery. Sourcing luxury produce is a possibility for Ocado as numerous bespoke suppliers have been found to refuse the prerequisite conditions demanded by major supermarkets (Ocado’s primary competition).

Posted by: Bradley Cronk

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