Why the Amazon Threat to Tesco is Real
Tech giant launched home grocery deliveries in some London postal codes this month
A Tesco supermarket in Basildon U.K. Amazon.com’s ambitions in British grocery will make it even harder for local supermarkets to turn a decent profit. PHOTO: BLOOMBERG NEWS
Order groceries for dinner during your lunch break at the office. That is the food-shopping dream peddled by Amazon, which launched comprehensive same-day grocery deliveries in certain London postal codes this month.
It is a nightmare scenario for Britain’s established grocers. But the near-term risk is less that the U.S. tech giant eats their dinner than that it raises the bar for what consumers expect, making it even harder to run a profitable online operation.
Tesco is most exposed, having 36% of Britain’s online market, according to brokerage house Bernstein.
Chief Executive Dave Lewis’s e-commerce strategy has mainly focused on making the sprawling business he inherited in 2014 pay. Home deliveries worth less than £40 ($59) now incur a surcharge, up from £25. Clothing and home goods websites have been consolidated. Having chased growth by opening new stores for many years, with disastrous consequences, Britain’s largest retailer is wary of chasing growth online.
Revealingly, however, online sales are still less profitable than they used to be. Competition with rivals like Ocado and Wal-Mart’s Asdahas pushed down the price of delivery, now as little as £1 at Tesco.
Mr. Lewis said Thursday that Tesco, which makes about 7% of its sales online, had seen no Amazon impact. That is hardly surprising given the novelty, geographical limitations and cost—an extra £6.99 a month for Prime customers—of Amazon’s latest offer. Indeed, Tesco’s first-quarter sales were strong by recent standards, up 0.3% like-for-like.
But Tesco is also trying out same-day delivery in London. Much as it might want to, the market leader has limited scope to stand back from the competitive fray. It will have to match Amazon’s service innovations just as it has matched the German discounters’ prices.
With prices falling by almost 3% a year, it is already hard to make adecent profit in U.K. grocery. Keeping up with Amazon’s logistics and marketing savvy will only make it harder.
