Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 318

What can Australian supermarkets learn from the UK online experience?

“The stakes are high to get this next stage of online growth right.”

Australian retailers are rapidly increasing their online penetration and looking at how best to fulfil the growing demand. Coles recently announced an exclusive partnership with Ocado, who have generally been acknowledged as the world’s best in online fulfilment.

As part of a recent research trip to the UK and Europe, I spent time meeting with local online grocery experts to understand the implications of this deal for Coles, supermarkets and other Australian retailers.

Who is Ocado and why is it a big deal?

UK-based Ocado is the world’s largest dedicated online grocery retailer. They have no physical stores. Their proprietary fulfilment solution is available to commercial partners like Coles, and includes the software, hardware, services and support.

I was interested to find out what makes Ocado’s system special, and the experts tell me that it is how they ‘pick’. Picking, i.e. getting the items off the shelves in the store or warehouse, is said to make up 40% of total fulfilment costs.

There are three main camps on picking, and some UK brands use a combination:

  • In-store picking leverages existing capital. Coles have predominantly been doing this until now.
  • Dark stores look similar to standard stores but with staff but no customers. Coles is currently trialling a dark store in Melbourne.
  • Automated centralised distribution centres or ‘CDCs’. Coles has committed to build two Ocado-system CDCs in Melbourne and Sydney.

The experts I met with concur that picking costs for in-store and dark stores are way behind the best-in-class offerings from Ocado due to average pick rates for items per hour as shown in Chart 1.

Chart 1: Average pick rates per hour

Source: Martin Currie Australia, interviews with online grocery experts.

How do you want that delivered?

‘Last mile’ delivery is one of the largest costs, so an important factor for success. Physical stores have an advantage due to their proximity to customer homes. Dark stores and CDCs are generally slower as they are based in cheaper industrial areas.

However, in terms of drop rates per hour, my sources tell me that Tesco (in-store) and Ocado (CDCs) are both around 4/hr due to Ocado’s intelligent routing. The question will be whether Coles can achieve this too.

In comparison, food aggregators such as Deliveroo or Uber average even less at 2/hr and are loss making but they make up this cost with a high revenue share from partner businesses.

Interestingly, in March 2019 Coles quietly started an UberEats trial in Sydney, delivering essentials such as milk, bread, fresh fruit and vegetables.

What does it cost to implement?

The capital expenditure on the new CDCs will set Coles back $150 million over the next four years but they are looking to double online deliveries with this initiative. They plan to service metro areas via CDCs, with non-metro orders fulfilled by the store network. This is like the deal that Morrisons has with Ocado.

In less than four years, Ocado’s system has propelled Morrisons to a larger online market share than Waitrose, despite starting much later. Morrisons have however recently loosened ties with Ocado, allowing Ocado to work with other competitors such as Tesco, Sainsbury’s, Asda, Aldi and Lidl.

What’s the alternative for other supermarkets?

Ocado have spent 18 years getting their customised offer right but there are alternatives for Australian companies, such as Woolworths and Metcash, given Coles’ exclusive deal with Ocado. Alphabot, a collaboration between Alert Innovation and Walmart, is said to be the one to watch, as it’s designed to automate an existing store footprint. Amazon’s model works well outside grocery, but has no proven grocery offering (but watch this space). Others include Instacart, Autostore and Picnic.

What’s at stake?

Ocado is a leader with a 20% share of the UK online market. Online is 6% of the total grocery spend and is predicted to grow to 9% by 2021. While UK online growth is starting to mature, Australia has space to grow from its low base. Online currently only makes up around 3% of the total Australian grocery spend.

Coles has a 45% share of the online grocery market but Woolworths is currently in front. Doubling online sales would add around $1 billion to Coles’ books.

In summary

The stakes are high to get this next stage of online growth right. Locking in Ocado may give Coles a boost for now, but Woolworths, with a team of 500+ at the WooliesX headquarters in Surry Hills, will be taking this development seriously.

 

Sources: Coles and Woolworths company reports, Ocado company reports, IGD, Statista, Martin Currie Australia. 

Jim Power is a Research Analyst at Martin Currie, a Legg Mason affiliate. Legg Mason is a sponsor of Cuffelinks. The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable. Please consider the appropriateness of this information, in light of your own objectives, financial situation or needs before making any decision.

For more articles and papers from Legg Mason, please click here.

 

RELATED ARTICLES

Which companies will do well in the turmoil of 2020?

Can Aussie banks rediscover their glory days?

Reporting season – expect early signs of downgrading

banner

Most viewed in recent weeks

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Latest Updates

Investment strategies

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Investment strategies

Don't let Trump derail your wealth creation plans

If you want to build wealth over the long-term, trying to guess the stock market's next move is generally a bad idea. In a month where this might be more tempting than ever, here is what you should focus on instead.

Economics

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Investment strategies

Will China's EV boom end in tears?

China's EV dominance is reshaping global auto markets - but with soaring tariffs, overcapacity, and rising scrutiny, the industry’s meteoric rise may face a turbulent road ahead. Can China maintain its lead - or will it stall?

Investment strategies

REITs: a haven in a Trumpian world?

Equity markets have been lashed by Trump's tariff policies, yet REITs have outperformed. Not only are they largely unaffected by tariffs, but they offer a unique combination of growth, sound fundamentals, and value.

Shares

Why Europe is back on the global investor map

European equities are surging ahead of the U.S this year, driven by strong earnings, undervaluation, and fiscal stimulus. With quality founder-led firms and a strengthening Euro, Europe may be the next global investment hotspot.

Chalmers' disingenuous budget claims

The Treasurer often touts a $207 billion improvement in Australia's financial position. A deeper look at the numbers reveals something less impressive, caused far more by commodity price surprises than policy.

Fixed interest

Duration: Friend or foe in a defensive allocation?

Duration is back. After years in the doghouse, shifting markets and higher yields are restoring its role as a reliable diversifier and income source - offering defensive strength in today’s uncertain environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.