RBTE 2016: Ocado's tips for eCommerce profitability

"It's tough to make money on eCommerce," admits James Matthews, managing director, GM, at Ocado.

Matthews is right, of course, but while the big four struggle with online grocery profitability, Ocado has been profitable for the last two years.

"For most retailers, online is less profitable and they would sooner a new customer turn up at a store than the website," he explained.

While stores come with expensive overheads, Matthews said e-tailers lose the benefit of location. "Everyone is equally convenient in terms of finding a retailer online," he said at RBTE 2016.

"And while e-tailers don't have to pay rent, there are gatekeepers like Google, Amazon and eBay," he added.

Matthews also pointed out that online retailers have to do all the work for the customer, right to their front door, which often makes retailers heavily reliant on technology which is expensive to buy, build and maintain.

"You underestimate how much you have to invest in technology to stay ahead of the competition," he said.

And a mere glance at Ocado's latest full-year financial results for 2015, details the e-tailer's £18.1 million investment in proprietary software (2014: £14.1 million), as well as £4.9 million (2014: £2.7 million) spent on computer hardware and software. That's before you count the 13.3 million spent on fulfilment development.

But Matthews is again right, when he says: "eCommerce is not going to go away."

And in order to tackle this channel – which may be convenient for the customer, but often a headache for the retailer – Matthews suggests biting the bullet and investing in technology.

"The more you invest in technology, the more it keeps the costs down," he said. "But times are hard for the small eCommerce-only retailer, and the investment required and money spent on digital marketing makes things tough."

He also said retailers need to own the last mile – like Ocado and AO.com – which means retailers have control over getting orders to a customer's doorstep. "If you can get that right, it gives the customer a reason to go to your retailer, rather than another one."

Matthews also noted the benefits of customer lock-ins and cross-selling, such as subscriptions, loyalty schemes and grocery delivery passes.

Speaking to RBTE delegates in the eCommerce Theatre, Matthews said he is replicating the Ocado model for general merchandising. Ocado launched the pet supplies website, Fetch, on its platform two years ago which bought in £30-£40 million in sales last year. Now the e-tailer is about to launch a premium beauty brand with Marie Claire, appealing to high-end beauty brands which would not want to be seen in the supermarket aisles.

"It has a different fascia, but has access to the technology and logistics of Ocado and the customer has the same one-hour delivery slot for these categories," Matthews explained.