Tesco’s CEO Ken Murphy has admitted he is still “unsure” how the supermarket is going to make money from its rapid delivery services, despite plans to extend their reach.
“It’s a hot market. It’s something that seems to be attracting a lot of money and investment and a lot of attention,” he said on a call with press this morning (18 June). Rivals Co-op, Sainsbury’s, Aldi, Waitrose and Morrisons have all made their products available on Deliveroo over the course of the pandemic.
“The truth is we are unsure yet about the economic proposition and we’re not entirely sure about what the customer need is. Is it 10 minutes? Is it half an hour? Is it an hour?”
Tesco’s online business first became profitable in April 2021, the month following the onset of the Covid-19 pandemic. Yet, rapid food delivery services like Deliveroo have so far been unable to turn a profit.
Nevertheless, having seen online grocery sales for the first quarter of 2021 grow by 22.2% year-on-year, Tesco is expanding trials of its own quick grocery delivery service Whoosh. The service launched in one Tesco Express store in May 2021, promising to deliver small grocery orders within 60 minutes. It has now been made available in a further 11 UK stores.
We remain focused on delivering great value, increasing loyalty and further developing our digital platform so we can serve our customers when, how and where they want.
Ken Murphy, Tesco
At the same time, Tesco has extended its partnership between Deliveroo and One Stop, the convenience store giant which has been a subsidiary of Tesco since 2003. After trialling the tie-up in August across a small number of stores, the service is now available across 260 of One Stop’s 900 UK properties.
“We need to solve problems for customers and we need to adapt to customer needs. That’s something you always have to have in the back of your mind,” Murphy said.
“Increasingly you need to think about the customer holistically, helping them through all sorts of different missions and looking at it in the whole rather than just a specific aspect. This has been a big learning from our online business.”
He added that there has been a “bit of a gold rush” in the rapid delivery sector as food retailers go on a “land grab” to try and acquire new customers, which is ultimately expensive. However, Murphy believes there is a way to make money in the service, as long as Tesco can find “the right model”.
“It’s a watch-this-space [strategy] rather than a slam dunk,” he said.Tesco sees strong online growth but stresses need to ‘plan for all eventualities’
Meanwhile, despite the easing of Covid-19 restrictions, Tesco’s online grocery business is still fulfilling around 1.3 million orders a week, an 81.6% rise on a two-year basis. The supermarket is also expanding its ‘click and collect’ offering, adding 46 new locations over the first quarter of 2021 to take its UK total to 400.
Murphy does expect to see online sales take “a little step down” when restrictions completely lift, followed by another when foreign travel opens up fully. But while Tesco doesn’t yet know where its online business will settle, Murphy said the business is “pleased” with how resilient it has been so far.
“As we emerge from the pandemic, we are at an exciting point. We’re becoming a more digital business,” he said.
“The combination of strong online coverage, extensive reach through our store infrastructure and a flexible business model means we have the fundamentals in place to provide a strong convenience offering to customers.”
“Reliable value” drives sales growth
Overall, Tesco’s group sales grew by 1% to £13.36bn on a one-year like for like basis during the first quarter of 2021. This figure represents growth of 8.1% on a two-year like for like basis, which reflects the unprecedented demand generated under lockdown.
Looking solely at the UK and Ireland, Tesco’s sales hit £12.42bn in the 13 weeks to 29 May, up 1.3% on a one-year like for like basis and 8.7% by a two-year comparison.
General merchandise sales surged 10.3% during the first quarter compared to the same period last year, while clothing sales rose by 52.1%.
The supermarket believes its push for “reliable value” is helping to drive sales growth by making it a “more attractive” place to shop.
The Aldi Price Match promise is now running across more than 500 lines, with Tesco claiming to have a “strengthened price position against all key competitors”. Clubcard Prices rewards for customers have also been extended to all its 1,844 Express stores.
Increasingly you need to think about the customer holistically, helping them through all sorts of different missions and looking at it in the whole rather than just a specific aspect.
Ken Murphy, Tesco
“Together [Aldi Price Match and Clubcard Prices] is a powerful combination, bringing our customers great value,” Murphy said, claiming that the supermarket’s value perception has remained strong through the pandemic and increased year on year.
According to YouGov’s BrandIndex, Tesco scores an average of 26.9 on value for the first quarter of 2021, a 2.1 year-on-year rise.
Tesco also claims its customer satisfaction rates are above those of its ‘big four’ competitors Asda, Sainsbury’s and Morrisons, with brand and quality perceptions also improving.
While the market remains uncertain, Murphy said he is pleased by the supermarket’s strong start to the year and remains excited about the opportunities to create value over the longer term.
“We delivered a strong performance in the first quarter, even as we lapped the high demand of last year due to the pandemic,” he added.
“We remain focused on delivering great value, increasing loyalty and further developing our digital platform so we can serve our customers when, how and where they want.”