BERLIN (Reuters) - Big
retailers are taking a calculated hit to margins to
invest in online grocery operations, in the hope they
can persuade consumers to add more profitable items like
clothes and computers to their orders of fruit and
vegetables.

Food has been one of the last things to move online because complex
logistics for fresh, chilled and frozen products make it an
expensive business. Retailers are also reluctant to lose the
potential for the lucrative impulse buys that occur in-store.

However, retailers in Europe and North America are now ramping up
their online food offer to compete with Amazon.com, which is
expected to expand its sale of fresh produce beyond a few trial
areas with the aim of complementing its non-food sales - and eating
other retailers' lunch.

"They are trying to hook customers up to brands for their grocery
shop and hope they will spend on non-food which is lower headache
and higher margin, which will drive profitability," said Sophie
Albizua of retail consultancy eNova Partnership.

"It is notoriously difficult to make money selling groceries online.
The reason why people do it and need to do it have nothing to do
with profit and nothing to do with groceries."

Britain has led the way in selling groceries online, with e-commerce
already accounting for some 5 percent of food sales. Other countries
like France are now catching up and the Boston Consulting Group (BCG)
predicts the global market will grow to $100 billion by 2018 from
$36 billion in 2013.

"COMPELLING ECONOMICS"

It has taken Tesco, Europe's second biggest retailer, 17 years to
bring its online grocery business close to the industry-leading
margins it used to make in its store business.

Tesco made a trading profit of 127 million pounds ($216 million) on
online grocery sales of 2.5 billion pounds in 2013, equal to an
operating margin of around 5 percent. That beat the 3.7 percent
Tesco reported for the group in 2013 - after it was hit by
restructuring costs - but came in below group margin at or above 6
percent for the previous three years.

Some analysts suggest that Tesco should focus less on investment in
costly e-commerce technology and logistics and more on cutting
prices if it wants to stop losing market share in Britain to German
discounters Aldi and Lidl.

But Tesco says it is not building its online business for the sake
of it: The aim rather is to attract more big-spending food shoppers
who also buy general goods, which traditionally sell at much higher
margins than groceries.

Tesco customers who buy food online as well as in store spend twice
as much as those who only shop in store. Those who also buy general
merchandise spend three times as much - although only 4 percent of
customers are currently in that last category.

Tesco, which still runs separate operations for online groceries and
general merchandise, plans to combine its grocery and general goods
deliveries - leveraging the sophisticated logistics network it has
built up for food to cut costs for the company, and offer customers
a faster service.

The one-hour delivery slots that Tesco offers seven days a week for
grocery orders are unmatched by any other general merchandise
retailer, including Amazon, points out Tesco multichannel director
Robin Terrell.

"As we start to add additional items or additional products to each
of those deliveries, the economics become incredibly compelling for
us but also a much more compelling offer for customers," Terrell
said.

It's a service that would make customers take notice, said Helen
Merriott, head of consultancy Accenture's retail practice in
Britain.

"If they could combine food and non-food and do that in a really
efficient way, using their own supply chain in a joined-up way to
get that to the customer when the customer wants it, it would be
really powerful," Merriott said.

SLIM MARGINS, SUPERIOR DELIVERY

British retailer Ocado, on track to make its first annual pretax
profit this year since it was founded in 2000, set up an online pet
store last year from which customers now order goods alongside their
food, and plans a kitchen and homeware online store later this year.

Ocado said last week over 30 percent of its orders now contain at
least one non-food item as customers benefit from the convenience of
the firm's one-hour delivery slots.

Deutsche Bank analysts Niamh McSherry and James Collins predict that
general merchandise will grow to 9 percent of Ocado's sales by 2023
from about 3 percent today.

"This is key for the Ocado investment case, namely because it could
support the profitability of grocery online retailing and thereby
facilitate further penetration of the grocery market," they wrote in
a note.

Dutch retailer Ahold, which runs U.S. online grocer Peapod as well
as sites for groceries and general goods in the Netherlands and
Belgium, is another that plans to keep investing in e-commerce
despite the hit to profitability.

In the first quarter, online sales for all Ahold's e-commerce sites
grew 20 percent to 362 million euros ($493.79 million), while the
group's underlying operating margin slipped to 4 percent from 4.1
percent a year ago. Its online grocery businesses have yet to break
even but its Bol.com general merchandise site made an unspecified
profit in 2013.

Ahold is using its network of supermarkets as pick-up points for
non-food online orders from sister firm Bol.com in the same way that
Waitrose in Britain does with partner John Lewis.

Britain's Asda is also investing in collection points, including in
car parks of London tube stations, garnering useful information for
its owner Wal-Mart, which is testing online grocery in its home
market as part of a bigger plan to integrate e-commerce into its
sprawling network of stores.

The world's biggest retailer, which made more than $10 billion in
e-commerce sales of non-food items last year, warns that investment
in online will eat into profits this year.

AMAZON ADVANCES

Most of these traditional players are hoping to have established a
bulkhead before Amazon expands its "Fresh" service, which is already
combining deliveries of groceries and non-food orders in a few trial
U.S. cities like its hometown Seattle.

In areas where AmazonFresh is available, trucks are bundling orders
of groceries with a pasta meal or fresh fish from local specialty
stores Amazon is partnering with, as well as non-food items like
digital cameras and video games.

"Customers who are using our service are not just satisfying one
shopping occasion but many shopping occasions," Doug Herrington,
Amazon vice president consumables, told the Consumer Goods Forum
industry summit in Paris last month.

Bernstein Research predicts that AmazonFresh could generate an
operating margin as high as 13 percent in denser urban areas once it
overcomes logistical challenges to reach scale.

"A roll out of Fresh could have a material positive impact on order
frequency, loyalty, and spend in other non-grocery related
categories," Bernstein analysts wrote in a recent report.

Amazon's Herrington expects the pace of delivery will be his future
battleground.

"We have yet to find customers who are begging us for slower
delivery," he said. "They are going to demand a shorter and shorter
window from when you purchase it to when it arrives in your home."

($1 = 0.5877 British Pounds)

($1 = 0.7331 Euros)

(Corrects spelling of Accenture's Merriott in paragraphs 15, 16)

(Additional reporting by Martinne Geller and James Davey; Editing by
Sophie Walker)