US-based retail behemoth Amazon has been an incredible performer. Its shares more than quadrupled in the past five years alone. Over that time, shares in Tesco (LSE: TSCO) are up just 3%. Yet Tesco is also an accomplished online retailer. Could the Tesco share price show growth like Amazon’s in years to come?
Here I look at some of Tesco’s digital opportunities and what it could mean for the Tesco share price.
Neglected digital giant
When talking about online retail giants, people rarely mention Tesco. Why not?
The company’s online operation has been growing at speed. Last year it more than doubled online capacity to 1.5m slots a week. Sales growth online was a staggering 69%. Online grocery sales were 9% of UK sales at the start of last year, but rose to 16%. So, Tesco’s online business is a fast-growing operation that already contributes close to one-sixth of grocery revenue in its key market.
Amazon growing offline
Amazon has been moving from an online focus to a mixed approach. It is still predominantly an online operation, but it opened a high street shop last month in Ealing. That echoes its growing footprint of physical stores in the US. A key argument for the attractiveness of Amazon’s business model has long been its pure online focus, which helps keep costs down.
Clearly Amazon’s online focus is greater than Tesco’s. Nonetheless, both have sizeable online retail operations and Amazon’s move into physical retail suggests to me that Tesco’s model may be more durable than some critics previously thought. That could help support the Tesco share price.
Another reason Amazon is highly rated by investors is its use of customer data. By understanding what customers want and need in great detail, it can deepen its relationship with them and build its sales.
But the same is true for Tesco in my opinion. Its iconic Clubcard loyalty scheme has been running for over a quarter of a century. It collects reams of data about individual shoppers, which can be used for targeted offers as well as understanding its customer base more broadly.
While many investors rave about Amazon’s Prime membership and its business impact, Tesco has its own Clubcard Plus programme. Like Prime, it uses a membership fee to generate revenue and drive customer loyalty.
Tesco share price risks
Despite all this, Tesco continues to face a lot of challenges. The rise of discounters in its home UK market, such as Aldi, Lidl, and B&M, has increased pricing pressure.
Additionally, the cost of packing and delivering online orders can make them less profitable than in-store purchases. Digital sales could mean existing customers become less profitable by shopping online.
Where next for the Tesco share price
The past five years may feel like lost time for the Tesco share price. But actually the business has transformed during that time. It recovered from an accounting scandal and sharpened its offer.
I don’t expect the market will price Tesco and Amazon shares on the same basis. Amazon has expanded into businesses like web hosting which form part of its valuation. I don’t foresee Tesco doing that.
But Tesco does have a bigger digital footprint than the City seems to give it credit for. In years to come, I see that as positive for the Tesco share price.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. christopherruane has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended B&M European Value and Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.