Research shows there’s still room for growth in online retailing, with supermarkets keen to capitalise on the opportunities - and making strides to iron out problems. Rod Addy reports

Free deliveries. Deep discounts on orders. Non-food at special prices. These are just some of the ways in which the supermarkets have been trying to persuade shoppers to use their online services. The activity has been frenzied in recent months, as the big players have embarked on an internet tug-of-war.
It’s easy to understand why - as the online market is a key battleground for retailers. When it comes to grocery, consultancy Verdict Research says annual sales via the internet were worth £1.4bn at the end of 2004 - up from £900m in 2003.Given all the attention internet shopping is receiving, Verdict says online grocery sales will hit £2bn by the end of this year. And Robin Knight of Deloitte Consumer Business Practice, says there’s no reason why the sales line should not keep on growing. “While there is a slowdown in the high street, there continues to be growth in online spend,” he explains.
But there’s another reason why the marketing has become more aggressive recently: retailers know they can’t let the gap between them and Tesco widen any further. is by far the market leader when it comes to internet grocery shopping and the service is now extending its reach into non-food areas through its online hypermarket idea.
When Verdict asked online grocery shoppers which service they had used to buy food and drink, a staggering 66% said they had used Tesco’s operation.At the same time, 32% claimed to have used Sainsbury’s service, 12% to have used Asda’s, with Waitrose Direct and Ocado taking 5% each.
The fact these figures don’t add up to 100% is because shoppers flit between one or more of the online services - which suggests building customer loyalty remains a key challenge for the retailers.
Sainsbury and Asda, in particular, have been making great efforts to improve the reliability of their services in recent months and extending their geographical coverage. At the same time they have been turning up
the marketing noise. The increased activity - and Tesco’s response - is a further sign of how serious they are about taking a share of a sector that is the second most important online market after electricals.
There’s more good news for e-tailers from market researcher Mintel. In its latest quarterly internet report, the researcher says the proportion of online shoppers buying groceries stood at 10% in June.
That’s significant for two reasons, says Mintel. First, the proportion is unchanged from the previous quarter, showing retailers are retaining customers after healthy growth around Christmas. Second, the number of internet users is rising. So the actual number of people buying groceries is also rising - and was up 5% over the previous quarter so that it today stands at two million. Better still, as more people head towards the internet to buy their holidays, cheap flights and cut-price CDs and DVDs, more of them will start using the net to buy their food and drink as well. So the only way is up.
Mintel adds: “Much grocery shopping is made up of standard repeat items and the internet is an ideal medium via which to order such items through saved shopping lists. Once converted to online shopping, people find it an easy option to edit and re-submit their previous order, thus aiding customer retention.”
Verdict agrees. In its E-Retail Report, the consultancy says shoppers rate convenience as the key reason why they use the internet to buy food and drink - in fact, it has a higher convenience rating than any other part of the retail market.
Shoppers have also recognised that it saves them time (probably thanks to the wider use of broadband) and a significant minority say lower prices are a reason for using the internet for grocery shopping.
“Retailers typically charge the same prices on and offline, so the perception prices are lower online is likely to reflect the fact that Tesco and Asda are attracting shoppers from other retailers that use higher price points in-store. By offering their wares online, Tesco and Asda win customers beyond their normal catchment areas,” says Verdict. But all the researchers also acknowledge that significant hurdles still remain for the ‘bricks and clicks’ retailers looking to develop their online business, particularly when it comes to sorting out the fulfilment and service glitches that continue to marr their records.
Such problems have featured regularly within the results in The Grocer 33 quarterly online shopping survey - although generally there have been improvements in the past year. Nevertheless, complaints about consumers being overcharged, being sent food close to its sell-by date, or being charged for premium products when regular lines were ordered, prompted the Office of Fair Trading to launch an inquiry at the end of last year. The OFT’s investigation is continuing.
Whatever the veracity of that inquiry, Jason Gissing, who is co-founder of online grocer Ocado, believes that such fulfilment issues have been holding back the development of the entire market.
He says: “If the delivery turns up late or there’s 5%, 10%, 15% inaccuracy over ordering, you won’t do it again. As soon as we all crack down on that, the market will grow exponentially.”
Gissing maintains that ensuring deliveries match customer expectations has been crucial to doubling sales in his business in the past year. And he points out that Ocado - which is unique among the online grocers in using a dedicated warehouse to fulfil orders - has succeeded in driving the number of product substitutions down to one in every fifth order. It also flags up where substitutions are necessary and gives customers appropriate options. Not surprisingly, Ocado was named best online retailer in The Grocer Gold Awards 2005.
Next to the likes of, Ocado is a minnow, reporting full-year sales of £107m versus Tesco, the top online grocery retailer, at £719m.
But following the opening of a Manchester depot in October 2004, Ocado now covers a third of the UK populace. That still falls short of Tesco’s boast of 96% coverage and Sainsbury’s claims of 77%.
Still, Ocado has been making waves. And its focus on service and delivery excellence is something that rivals have been trying to emulate as they start powering up their online operations again.
Sainsbury, for instance, has been ramping up its online Sainsbury’s to You offer after developments were frozen while it sorted out availability and service levels in its stores. Chief executive Justin King said last month it had boosted availability of online purchases, had slashed average shopping times and was holding itself to one-hour delivery slots in more than 60% of stores - offering customers £10 off their next order if goods were late.Asda, meanwhile, is keen to build some momentum behind its online service, partly to offset its difficulties in finding new sites for superstores.
As well as tackling service issues, the big retailers are also extending the ranges they sell online. Non-food is proving to be a key differentiator - and has been featuring heavily in the marketing activity of late, notably with offers of cut-price CDs and DVDs sourced via Jersey. For, with its wide coverage of the UK, broadening the offer is clearly a no-brainer. It cannot grow by expanding territorially - so needs to boost sales through new customers and new ranges. For the others, offering non-food products such as CDs, DVDs and books at great prices is an excellent way of luring new online shoppers or poaching customers from other sites. After all, as Verdict’s research shows, there are a lot of disloyal online shoppers out there.
As the war between the online grocers has intensified, there has been one death: Iceland pulled the plug on its service in April, saying it was a distraction as it looked to rebuild its high street business. But it is unlikely there will be further casualties. The market is growing and the remaining retailers are committed to accelerating their presence in this retail channel.
So you can expect the marketing noise to intensify in coming months. Mind you, even as the market gets more competitive, it unlikely that Tesco will ever lose the online tug-of-war.