By Neil Saunders
Tesco’s decision to launch same-day delivery for groceries on a U.K.-wide basis is partly a logical improvement to its existing online services. However, it is also designed to be a defensive measure against the potential rise of Amazon in the U.K.
In a cutthroat market where grocers are vying for share, Tesco’s move will likely be followed by other players and will, ultimately, give shoppers much more flexibility.
While the barriers for Amazon will be higher in the U.K., they will not deter the behemoth from its grocery ambitions. Amazon typically takes a long-term view and will continue to invest in growing its U.K. grocery business. It will be assured by its systems and logistics capability, which will prove to be an advantage as it scales up.
However, in our opinion, today’s announcement by Tesco makes it even more likely that Amazon will, over the medium term, look to make an acquisition in the U.K. grocery market. While this is unlikely to be one of the larger players, an operator like Ocado would give Amazon the scale and flexibility it needs to offer a sustainable U.K. wide online grocery service.
Although Tesco now has first mover advantage on same-day grocery delivery, the long-term implications are not necessarily so rosy. Margins in online grocery remain wafer thin, and while consumers will pay a premium for same-day service, they will not bear the full cost. As such, as other players increase flexibility in deliveries and as delivery prices come under further pressure, the move could ultimately be dilutive to profits.
Neil Saunders is managing director of GlobalData Retail.