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

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

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.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

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.