OCADO VERSUS TESCO.COM
By 2009 online retailing had become an important channel for many product catego-
ries. However, it still represented only a relatively small part of the grocery business.
Brick-and-mortar grocery retailers found it challenging to run a successful online
business: despite category knowledge, they had to develop a completely new busi-
ness model. Still, a few grocery retailers such as Albertson’s in the US, Auchan and
Carrefour in France, and Tesco and Sainsbury’s in the UK managed to successfully
operate an online service in parallel with their physical stores. Tesco, in particular, was
often cited as an example of a retailer running a profitable online business and was the
biggest online grocery retailer in the world.
Several purely online start-up grocers were also launched around the world during
the internet boom. However, few succeeded. Exceptions were LeShop in Switzerland
and Ocado in the UK. Ocado was an internet grocery retailer headquartered in
Hatfield, Hertfordshire. The company was founded by three former investment
bankers in early 2000 and rolled out in early 2002. By 2009 Ocado had grown from
its original three founders to over 3,000 employees and was just about to become
The challenge online grocers faced was in developing a business model that would
allow them to sell groceries over the internet in significant volumes, at reasonable
prices and still make a profit. The brick-and-mortar supermarkets and the start-up
grocers competed with one another, but each had a different business model for
their online operations. The general opinion was that the brick-and-mortar grocers
had a more sustainable model than start-ups; however, Ocado was challenging that
assumption. Had Ocado found a new way of making pure online retailing a profitable
business? Or was Tesco CEO Terry Leahy right in saying that Ocado’s business was
not sustainable as food retailing had such low margins, and established supermarkets’
online businesses were a more profitable way of selling and delivering groceries?
The UK online grocery market
The UK online grocery market was estimated to be about £2.4 billion* in 2007, grow-
ing by nearly one-third that year.
Though it could still be characterised as a niche of
the retail grocery market, accounting for at most 2 per cent to 3 per cent of total UK
grocery sales, it was growing over six times as fast as the market as a whole. The market
was forecast to more than double over the next couple of years to reach £6.9 billion
: Case Study CS.8 from Ocado Versus Tesco,
, 3-0323 (Keller-Birrer, V. and Tsikriktsis, N.),
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