Ocado must back up savings with service

Now that Waitrose is delivering people’s shopping inside the M25, Ocado needs to work harder to justify its existence. Its strategy is to encourage customer loyalty with a supermarket subscription.

This week it launched the Ocado Saving Pass, offering customers a 10% discount on a range of 500 branded goods in return for a subscription fee. The fees come in a range of price points: paying between £1.99 to £5.99 a year opens up discounts in particular categories, while an £8.99 annual fee earns the discount across all categories.

Until the expiry of its non-compete contract with Waitrose, which had agreed not to offer delivery services within London until July 2011, differentiation had not been imperative to Ocado. Being an online-only supermarket was unique in itself, and sourcing its produce mainly from Waitrose positioned it at the top end of the market, where few groceries retailers compete online.

Recently, however, it has made several moves to set itself apart, for example by agreeing to distribute speciality products supplied by French supermarket Carrefour. The Ocado Saving Pass appears to be another attempt at doing something different.

Using customer data to establish long-term relationships through promotional incentives is not unique to Ocado, though opting for an annual subscription model shows how crucial they think it will be to convince people to make regular orders.

Those who sign up to a subscription service might be fewer in number than consumers who collect Nectar points from Sainsbury’s, or carry a Tesco Clubcard, but those who do pay that annual fee are likely to be customers who have the intention of coming back often.

If Ocado can cultivate this base of customers by learning their preferences and giving them more targeted offers down the line, it has the opportunity to earn something rare and valuable in the supermarket sector – customer relationships based on real loyalty rather than discounts. Whether it has the will and the resources to collect and sort shoppers’ data on this level of complexity has yet to be seen, however.

Gaining real loyalty will also require Ocado to distinguish itself in other ways, most notably by making its delivery service the most convenient and reliable in the market. This should be Ocado’s priority: as a delivery-only retailer, if it can’t get this right consumers will find little else to recommend it.

Ocado still has plenty of headroom in terms of awareness building, and its sales are still growing, although at a slowing rate. But the company will be concerned that its average order value has dropped since last year. That is one measure Ocado should be seeking to address through attracting regular subscribers.

The idea of subscribing to a supermarket seems odd, especially since it is a sector where shoppers’ choices are fundamentally driven by price and convenience. Those that do subscribe are likely to be worth keeping, but Ocado must be certain that its service is of a level to justify such loyalty.