As Tesco addresses all the problems in the UK store business, one area that provides a ray of sunshine is the online grocery operation.

As Tesco addresses all the problems in the UK store business, one area that provides a ray of sunshine is the online grocery operation and…every little helps when it comes to turning around Tesco’s overall UK market share.

Yesterday’s Tesco analyst and investor trip highlighted just how far (under the previous management regime) the UK business had been allowed to fall behind the competition, in terms of customer service, store design, merchandising and ranging.

But one key area where Tesco has not lost its edge is in the huge online operation and it is here where management are getting some traction from new investments. Admittedly, Tesco’s expertise in grocery online has not yet been translated into success for the non-food venture of Tesco Direct where operating losses persist, but that may be mainly down to the heavy bias to low-margin electricals in the sales mix.

With sales of over £2bn, Tesco grocery online certainly has the scale and market dominance to be profitable, but everybody else is jumping on the bandwagon, from Ocado to Sasinbury’s, so it was a surprise to hear on the trip yesterday that the business is seeing market share growth again and off a pretty high market share base of 50%.  

One innovation that is contributing nicely to the growth is the “Click and Collect” service in groceries that was trialled two years ago and is now operational in over 100 stores. Appealing to young families with kids who are always on the move, busy working people and shift workers, the service has been very popular, generating a very similar average transaction value as in Home Delivery. Two-hourly collection slots are available for a charge of £2/3 and the chilled food is stored in temperature controlled collection points in the store car park.

The other big investment in grocery online is in so-called “dark stores” and though Asda is also in this market (as they are in Grocery “Click and Collect”), Tesco seem to be building a big edge here relative to the industry.

Now, if you thought a “dark store” for online fulfilment was, literally, a store that wasn’t open to the public, but was exclusively devoted to picking and packing online orders…then think again, because the new generation of “stores” are giant mechanised distribution warehouses. Tesco have as many as 700 people working at Enfield picking and processing 145,000 products a day.

Clearly, the bulk of the business is serviced from the stores themselves and that business model still makes sense, but in big catchments with a high density population the business needs more capacity to be able to offer customers a good range of delivery slots and a “dark store” provides that. Picking starts at 4am in the morning enabling the first customers to get their orders delivered at 7am.

The site in Enfield opened in January and was the 4th to service the London market, after Croydon, Greenford and Aylesford and these “dark stores” now fulfil 80% of all the orders in London. The next site opens in Crawley early next year, followed by Erith in Kent and Didcot.

What is most surprising about the sites is just how mechanised and automated they are. Croydon, the first “dark store”, was all manual operation, but Enfield has a huge high-level “multi-shuttle” installation famed by a company called Dematic for storing, sorting and retrieving customer order trays. And the site in Erith will have a multi-shuttle unit 4 times as big as the one in Enfield.

It is, of course, a bit of a back-handed compliment to Ocado that the site in Enfield looks very much like Ocado’s much-maligned but highly-automated warehouse in Hatfield. Poor old Ocado still hasn’t convinced the City that its business model will ever make money, despite the superior picking accuracy and order fulfilment it provides, but Tesco clearly thinks that the big investment they are putting into these sites will make a good return. And we will hear on December 5th how far the better grocery online sales growth has helped Tesco’s UK LFL sales in Q3.


About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.