Will Tescos’ Proactive Approach to the Online Shopping Market Reap Rewards?

on Sep 26, 2012
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Tesco (LON:TSCO) is planning a major expansion of its capacity to deal with online shopping smoothly as it looks to cash in on the recent surge in popularity of internet-based grocery shopping, The Guardian reported on 24 September 2012. With customers increasingly turning to virtual supermarket services, Tesco is cutting back on store openings to focus on its web arm where sales are expected to double in the next five years.

Nicknamed “dark stores” in the industry, these shops-cum-warehouses are not open to the public but are used to assist nearby stores where staff cannot keep up with orders placed by online customers. Tesco already has four of these internet-only stores in London and will open a fifth in Crawley, Sussex, early next year. The British supermarket chain also plans to introduce a further site in Erith, Greater London, in 18 months’ time. Tesco’s director of internet retailing Ken Towle even revealed plans of opening dot.com-only stores beyond the South-east, around Manchester and Birmingham, as the supermarket chain seeks to keep up with rapidly growing demand for groceries ordered online in “dense urban areas”.

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!m[](/uploads/story/466/thumbs/pic1_inline.png)On a store visit to a revamped Tesco supermarket in Bishop’s Stortford, north of London, Towle said, quoted by The Financial Times: “Over time, I think we will be into tens, but not hundreds [dark stores].” He also explained that each new dot.com-only shop would enable Tesco to redesign 10 regular supermarkets to make those stores easier for customers to shop in, as online demand is constantly growing. Towle predicted that demand for online groceries would at least double from the current 5.5 per cent of Tesco’s total sales, and reach £5 billion in the next five years. “Whatever the demand is, we will be well above it in terms of supply,” he said.

Tesco’s decision to expand its network of online-only stores is a threat for rivals J Sainsbury (LON:SBRY), Asda, and Waitrose, which are planning to expand their online operations too. The move could also potentially make it more difficult for WM Morrison (LON:MRW) to break into online food retailing. Tesco’s online expansion plan, however, comes as especially bad news for their already under-pressure internet rival Ocado (LON:OCDO), which has 14 per cent of the UK online grocery market. Ocado has recently reported lower-than-expected sales growth figures, yet its reaction to Tesco’s move was to shrug off the threat. “This is actually an opportunity for us,” the company said. “There is a change underway in the shopping habits of customers. If more customers start shopping online, history has shown that this represents an opportunity for Ocado. “

Meanwhile, Tesco’s chief executive Philip Clarke also provided an update on the progress of the chain’s £1 billion investment to improve the performance of its UK business. He unveiled a series of changes in regards to its physical shops, including moving food to the front of stores, new product lines, introducing more bakeries and a warmer ambience. Clarke said: “We have only just begun, we have a long way to go.”

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