HSBC's huge call: Online grocery delivery is 'the emperor's new clothes'

If there is one thing that pretty much everyone is agreed on, it is that online shopping and home delivery are the future.

Not at HSBC.

HSBC retail analyst David McCarthy and his team just made the most surprising call of the year so far, questioning the “viability” of the entire sector, calling it the “emperor’s new clothes”:

The Emperor’s New Clothes

On-line retailing may be glamorous and exciting for those involved in developing it but the fact that the on-line grocery market continues to grow at only half the rate of discounters (and a quarter of the rate in cash terms) suggests consumers value lower prices over home delivery.

“We remain unconvinced of long-term viability of home deliveries for grocery,” they conclude. HSBC has a “reduce” rating on Ocado stock which has been battered by news that Amazon will also launch a grocery delivery service in London. Ocado was down 1.7% at £2.59 per share this morning.

HSBC’s case focuses on the added expense of delivering shopping rather than persuading consumers to bear that cost by going to the store themselves. Two of Britain’s fastest-growing supermarkets are the discounters Aldi and Lidl. They have 17% and 16% sales growth year on year, respectively. And they are not online:

Again we are perplexed by the retailers’ justification that they must be involved in on-line as it is the future (but again Aldi and Lidl are not on-line). We continue to ask, when will it be profitable on a fully costed and standalone basis? This is not a new industry — grocery on-line started last century. Once again, we ask what size the market would be if consumers had to pay the full economic price of GBP15-GBP20 per order?

The way HSBC sees it, supermarkets like Sainsbury’s and Tesco are involved in a mad war against Lidl by offering loss-making online delivery but higher in-store prices: “What is puzzling to us is that rather than offering core customers lower prices, so many retailers have cross subsidised on-line activities by effectively charging higher prices in store/lower prices on-line via the profligate use of money off vouchers. We view the use of such vouchers differently to the retailers, who view them as incentivising customers to shop on-line. We view such vouchers as incentivising customers NOT to shop in store.”

What McCarthy doesn’t describe in his note is growth at Ocado. In FY 2015, Ocado’s revenue was £1.1 billion, up 17%; net profit was £11.8 million, up 62%. That’s right in line with Aldi’s growth, and modestly profitable.

Disclosure: The author owns stock in Ocado.

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