Retailers swallow online food cost

Berlin - Big retailers are taking a calculated hit to margins to invest in online grocery operations in the hope they can persuade consumers to add more profitable items like clothes and computers to their orders of fruit and vegetables.

Food has been one of the last things to move online because complex logistics for fresh, chilled and frozen products make it an expensive business.

Retailers are also reluctant to lose the potential for the lucrative impulse buys that occur in-store.

However, retailers in Europe and North America are now ramping up their online food offer to compete with Amazon.com , which is expected to expand its sale of fresh produce beyond a few trial areas with the aim of complementing its non-food sales - and eating other retailers' lunch.

Groceries online

"They are trying to hook up customers to brands for their grocery shop and hope they will spend on non-food which is lower headache and higher margin, which will drive profitability," said Sophie Albizua of retail consultancy eNova Partnership.

"It is notoriously difficult to make money selling groceries online. The reason why people do it and need to do it have nothing to do with profit and nothing to do with groceries."

Britain has led the way in selling groceries online, with e-commerce already accounting for about 5% of food sales. Other countries like France are now catching up and the Boston Consulting Group (BCG) predicts the global market will grow to $100bn by 2018 from $36bn in 2013.

It has taken Tesco, Europe's second biggest retailer, 17 years to bring its online grocery business close to the industry-leading margins it used to make in its store business.

Cutting prices

Tesco made a trading profit of $216m on online grocery sales in 2013, equal to an operating margin of around 5%. That beat the 3.7% Tesco reported for the group in 2013 - after it was hit by restructuring costs - but came in below group margin at or above 6% for the previous three years.

Some analysts suggest that Tesco should focus less on investment in costly e-commerce technology and logistics and more on cutting prices if it wants to stop losing market share in Britain to German discounters Aldi and Lidl.

But Tesco says it is not building its online business for the sake of it: The aim rather is to attract more big-spending food shoppers who also buy general goods, which traditionally sell at much higher margins than groceries.

Compelling offer

The one-hour delivery slots that Tesco offers seven days a week for grocery orders are unmatched by any other general merchandise retailer, including Amazon, points out Tesco multichannel director Robin Terrell.

"As we start to add additional items or additional products to each of those deliveries, the economics become incredibly compelling for us but also a much more compelling offer for customers," Terrell said.

It's a service that would make customers take notice, said Helen Merriott, head of consultancy Accenture's retail practice in Britain.

"If they could combine food and non-food and do that in a really efficient way, using their own supply chain in a joined-up way to get that to the customer when the customer wants it, it would be really powerful," Merriott said.