Tesco’s dotcom model

Tesco is widely thought to be the only grocer to make a profit from its dotcom operation. And judging by the reaction from the City after analysts visited its dotcom-only store in Aylesford, Kent, on Friday, the grocer looks poised to widen the gap on its competitors.

The Aylesford shop is the latest of Tesco’s “dark stores” and has an automated sorting system. The retailer said investment in the site totalled £15m and with sales at £1m a week, it is already profitable after all costs, including property. That is without the site running at full capacity too. From this store, full capacity could take it to sales of £3m a week.

Interestingly, the opening of Aylesford meant Tesco took out dotcom orders from six Extra stores in the location. And while total store takings initially fell, like-for-like growth accelerated - a potential win-win for Tesco. The grocer was keen to point out that dotcom shops are not a nationwide solution and it will still use stores to pick from in certain areas.

A third dotcom store is planned for Greenford, London, later this year. There is probably capacity for a total of about 10 in future in areas of high population densities, coupled with a high level of online participation in mainstream stores, potentially hindering like-for-likes when dotcom sales edge over 10%.

For Tesco, dotcom stores are complementary to picking in its mainstream shops. Those far-flung places with low online penetration clearly do not need a dotcom store. And Tesco has managed to limit the drive time to a maximum of about one hour from its dotcom sites.

Ocado, on the other hand, has a centralised distribution network. Its potential IPO will raise money for a second depot, but will it be enough to make a profit?

Tesco is expected to report dotcom sales of £2bn in the year to February. This not only puts pressure on Ocado, but on Sainsbury’s, Asda and, as for Morrisons, incoming chief executive Dalton Philips needs to tackle online before he gets left too far behind.