"We operate in an exciting and demanding marketplace where we have the opportunity to use our intellectual property to improve our market leading service and shape the future of online grocery retailing."

Jason Gissing, Director of People, Culture and Communications

Marketplace potential

Pure exposure to structural growth

As the online proposition gets better the market opportunity gets bigger. Delighting customers by improving the service will encourage adoption and drive demand for online grocery.

Ocado provides an opportunity to fully access developments and growth in this early stage market, unhindered by bricks and mortar customer fulfilment processes.

The UK grocery market is huge

At £151bn the UK grocery market is as large as all other UK retail markets combined. The UK grocery marketplace is highly competitive and is dominated by the big four grocers: Asda, Morrisons, Sainsbury and Tesco. Competition for market share is intensive as retailers strive to create new growth opportunities, reformulate propositions and build more multi-channel customer relationships.

Retail is moving online

Spurred on by the continuing rise of broadband penetration, smartphone ownership, internet familiarity within the home and the evolution of website design consumers are increasingly becoming more comfortable with and place more confidence in online retail. Online retail markets have grown as shoppers have broadened from the original tech savvy early adopters to a customer base that broadly reflects the demographics of the UK. This means that online penetration has reached almost 10% for categories such as clothing which commentators previously suggested would not move online.

However, grocery has been slower to move online

Historically, online grocery retail has lagged the development of other online categories due to the specific nature and logistical challenges traditionally associated with grocery. Only a small proportion of grocery has so far moved online, estimated to be less than 3% of the overall grocery market.

Although online grocery is at an early stage of development it is widely anticipated to become an increasingly important segment of the overall grocery market. IGD expects online grocery sales to become a larger proportion of the overall grocery market over the coming years, with total sales forecast to be over £7bn by 2014. This represents a forecast annual growth rate many times faster than that of the wider grocery sector.

Structural drivers fuel future growth

Consumers seeking a better experience in how they buy their groceries are driving the transition to online grocery shopping. As long as online grocery retail continues to become more desirable from a customer's perspective the market will show substantial growth.

Simultaneously there has been an ongoing drive towards providing greater consumer choice particularly across a range of online food and non-foodstuffs (catering for issues around well-being, sustainability, provenance as well as greater differentiation across the value-premium spectrum). Operating models that support consumer diversity have the ability to unlock further potential within this market.

The UK grocery market is as large as all other retail markets combined (£151bn)

The UK grocery market is forecast to grow at less than 5% per annum

UK Grocery Market (£bn)

Ocado's marketplace

Coverage: Over 70% of UK households and growing

Coverage: Over 70% of UK households and growing

Overcoming the unique challenges of online grocery retail

Demand for online grocery in the UK has previously been hindered by the unique challenges associated with online grocery retailing.For online grocery penetration to catch up with other online markets, retailers have to overcome these challenges and meet consumers' needs.

The logistical challenges associated with online grocery are immense and represent one of the greatest barriers to entry. The retailing mantra of providing outstanding customer service is simple to understand. However, customer service and fulfilment within the online grocery space is complicated: picking an average of 55 items an order, across a product range of over 20,000 SKUs, that have a varied but limited life, requiring handling and storage across three temperature regimes (chilled, ambient and frozen) for onward delivery to customers in narrow time slots is not for the faint-hearted.

Different approaches to addressing the market opportunity

The approach of the traditional grocery retailers to these online challenges has been based on using their stores and store-based systems. This contrasts with the Ocado centralised picking model - a pioneering approach based on complex systems and software that are bespoke to Ocado and difficult to replicate as the key intellectual property resides within Ocado.

Less than 3% of total grocery market has moved online, forecasters predict up to 40% to move online by 2025

Growth rates of over 15% per annum forecast for online grocery market for the next 5 years

UK Online Grocery Market (£bn)