Ocado case study (1) - No stores no limits Ocado Home...

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Home Delivery Home delivery of groceries is both an attractive concept for harried, busy consumers who dislike their weekly shopping duties and an amazingly complex challenge for businesses to achieve at a reasonable cost. The ideal target customer for this service is a person who leads an extremely busy and hectic life, dreads visiting busy grocery stores (where they often are jostling with fellow busy people who also can’t get to the store any other time) and has a fairly high income. While the group of customers that fit this profile will never be a majority of the market, it has been estimated that there is a market of between ₤3 billion and ₤9 billion (5 – 15% of the total market) in the U.K. and between $5 billion and $25 billion (1% - 5% of the total market) in the US. Grocery stores are increasingly looking at home delivery as an alternative channel to grow their business and capture or divert business from other grocers in a cut-throat industry. While there may be a substantial market for home delivery, providing this service in volume at “reasonable” prices presents a substantial challenge. In particular, there are three substantial hurdles: 1. Grocers must pick the individual orders for customers – thus increasing costs substantially over existing supermarkets where customers select their own orders. 2. Grocers must either deliver the goods to the consumer’s home (i.e. conquer the last mile) or hold the orders for customer pick-up – both of which involve a substantial increase in both costs and operational complexity. 3. While hurdles 1 and 2 can be surmounted, the third hurdle lies in convincing consumers that this service is worth the additional price of delivery (Tesco, Sainsbury’s, Albertson’s). In Ocado’s case, orders over ₤75 have no delivery fee, so the hurdle in this case is whether this service can be provided in a profitable manner. If it can save consumers time (as yet an uncertain proposition because of the need for customers to “learn” how to manage placing Internet orders), then they may be willing to pay a premium for this service. If not, then the existing model of customers serving themselves at supermarkets will remain substantially the same. Ocado’s main competitors in Grocery Home Delivery 1 No stores, no limits ---- Ocado
Tesco Britain’s top supermarket chain has annual sales of ₤20 billion ($30 billion) in 690 British stores. While Tesco initially was criticized for its go-slow approach to selling groceries over the Internet, it has become the world’s largest online grocer and now sells through 250 outlets and had revenues from home deliveries of ₤356 million ($520 million) vi in the year ending February 28, 2002. Most importantly, Tesco has managed to develop an operational model that is profitable, with a net operating margin of 5% on approximately 4 million orders per year. All of this has been achieved with a relatively small investment of $59 million. Tesco has kept the operations of home delivery

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