Ocado Shows U.S. Chains What It Takes To Break Even In Online Grocery

U.K. online grocer Ocado is growing—but it's struggling to stay profitable. The company said this week that its sales were up 15.5 percent for the first half of 2013, but it lost £3.8 million ($5.8 million), down from a year-ago profit of £200,000 ($305,000).

The biggest difference was a big deal: Morrisons, the fourth-largest grocery chain in the U.K., agreed to a 25-year deal to have Ocado handle its online orders and deliveries. Ocado said the costs of completing that deal, along with costs of building distribution centers that haven't opened yet, were the main reasons for the loss.

The Morrisons deal means that chain will be able to jump into the burgeoning U.K. online grocery business almost immediately, without a long ramp-up to build facilities and make first-timer mistakes. Its larger rivals Tesco, Walmart-owned Asda and Sainsbury's are all already in the game, while number-six U.K. grocer Waitrose supplies groceries for Ocado's own online-grocery business.

Compared with the U.S., where Amazon's (NASDAQ:AMZN) online grocery business is still trying to get its footing and even Walmart (NYSE:WMT) hasn't tried to import the delivery expertise of its U.K. subsidiary, this U.K. landscape looks thoroughly alien. It's roughly the equivalent of Walmart, Kroger (NYSE:KR), Costco (NASDAQ:COST) and Safeway (NYSE:SWY) all doing online grocery delivery. Instead, those giants are all waiting for the proverbial right moment, while smaller players like Ahold's Peapod subsidiary and FreshDirect are slowly expanding their businesses.

The irony is that part of what may be scaring the big U.S. grocery chains are the operational statistics that have come from Ocado as it straddles the line between profit and loss. Ocado says it handles 139,000 orders per week for 360,000 active customers, with 158 orders per delivery truck per week and an average order size of £114.90 ($175). That's what it takes in the less-spread-out U.K., where customers already largely accept online grocery delivery, to hover at break-even. A significant profit? No numbers for that yet, sorry.

That means short of a more imminent threat from AmazonFresh, U.S. grocers may leave it to the little guys for quite a while longer.

For more:

- See this Guardian story
- See this Internet Retailer story

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