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Home DeliveryHome delivery of groceries is both an attractive concept for harried, busy consumers who disliketheir weekly shopping duties and an amazingly complex challenge for businesses to achieve at areasonable cost. The ideal target customer for this service is a person who leads an extremelybusy 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 thegroup 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 totalmarket) 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 captureor 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 substantialhurdles: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 inboth 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 thiscase is whether this service can be provided in a profitable manner. If it can saveconsumers 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 apremium 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 Delivery1No stores, no limits ---- Ocado
TescoBritain’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 revenuesfrom 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 theoperations of home delivery