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By Emma Thomasson
PARIS (Reuters) - British online grocer Ocado does not see much room for major food retailers to cut their prices further even as they battle to stop discounters stealing market share, its chief executive said on Wednesday.
Britain's traditional "big four" grocers have been losing shoppers to German discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL] in recent years and are also suffering from a shift from out-of-town boxes to local convenience stores and online.
Tim Steiner said Ocado - which has seen its margins squeezed by fierce price competition just like traditional UK players - has been a beneficiary of the structural changes in the market and expects that to continue.
"Pricing is under pressure at the moment because people are competing for sales, but with the falling profitability we are already seeing due to sales coming out of the big box stores, there is not far they can go," Steiner told Reuters in an interview at the World Retail Congress in Paris.
Tesco, Asda, Sainsbury's and Morrisons have all cut prices, squeezing margins. Market leader Tesco has warned on profits three times in two months and is now embroiled in an accounting scandal, while Morrisons warned on profits in March.
Analysts expect new Tesco boss Dave Lewis to cut prices further to bolster its flagging trade, but Steiner said he did not have much room given the group's falling profitability.
"Tesco is not a 6-7 percent of sales profit company that can reduce that to 3-4," he said.
"How far are they going to go on this unless they can change this trend? At the moment it is not Tesco's losing out to Sainsbury's or losing out to Morrisons. It is the format that is losing out."
Industry operating margins have come down to an average of about 1.6 percent in the last twelve months from 4.1 percent in the previous five years.
Britain's online grocery market is growing at around 15 percent a year, far outpacing the broader market, and while it still accounts for only about 5 percent of total grocery sales, industry group IGD sees it more than doubling in value over the next five years to 17 billion pounds.
SITTING DUCKS?
Ocado saw the growth of gross retail sales accelerate to 15.5 percent in its fiscal third quarter even after Tesco cut the delivery price for its online grocery orders.
"We're benefiting from continual investment in our customer proposition, whether that is in range, pricing or the service levels," Steiner said.
By contrast, Sainsbury's reported on Wednesday that tough competition dampened its online grocery sales growth to around 7 percent in its fiscal second quarter to Sept. 27 as it cut its annual sales forecast and said it would review its dividend.
Ocado has not yet made an annual pretax profit since it was founded in 2000 but is forecast to do so for its 2013-14 financial year. It has seen its share price fall more than 40 percent this year on concerns about the UK market and doubts around its hopes for an international partnership to replicate a deal with Morrisons to provide its online grocery service.
Ocado, whose range includes products supplied by upmarket grocer Waitrose (JLP.UL), hopes that the smaller design of a new distribution centre it plans to open at the end of 2015 will provide a model for deals with overseas retailers.
Steiner said he was talking to many international retailers and hopes to say more next year about who it will work with next.
"People don't want to be sitting ducks waiting for Amazon to finally work it out and come and kill them. They need to prepare for the change that is coming and we're here to help them do that."
(Reporting by Emma Thomasson; editing by Kate Holton and Elaine Hardcastle)