Innovative Retailer – Ocado

The Name: Ocado

The Place: Well, mainly in two places with lots of other little bits sort of attached if you see what I mean.

Not really: The two full-on warehouses with all the whizzbang technology are in Hertfordshire and Warwickshire but then there are 11 ‘spoke’ sites around the country. Head office is also in Herts.

The story: In 2000 three ex-Goldman Sachs bankers decided to set up a supermarket that was only online, nothing so ordinary as bricks and mortar for them but a vast automated delivery machine. It remains the only dedicated online supermarket. It was all about software you see, that’s their marketable product not food, and it’s all very clever and very expensive. The only trouble is…

Yes? Profits.

Not big enough for those pesky City analysts? Non-existent actually. They’ve £750 million of sales and not a profit in sight. As someone once put it “Ocado begins with a zero and ends with a zero”. And that’s what they make – zero. But Retail Insider is taking a long view on this – let’s be clear – no one makes any money on online sales. Ocado chief executive Tim Steiner claims they all make a loss of around 10% but they can’t afford not to be in the game. If online food and grocery growth rises as predicted to £11 billion by 2017 as per IGD then Ocado is going to bring home the bacon big time.

And if it doesn’t? Then all the other supermarkets will have been right all along that this is doomed to failure with the expense never justifying the spend. Actually, of course, there is one notable exception to the doom-mongerers.

And that is? Morrisons. Tardy old Morrisons has never bothered with online. They like things the old-fashioned way, the customer does the work – you go in, pick the stuff off the shelves, take it to the checkout, pay for it, even scan it yourself, and then lug it home. Now that’s the way to make money. Ocado has to do all of that for you and still cannot charge more than 50p for a can of beans because the customer won’t pay any more online than they will in-store.

Get back to the point: Sorry, Morrisons changed their minds about online quite recently and we are now literally on the eve of their foray into online retailing, which has been handed over lock, stock and barrel to our technological friends at Ocado. As from tomorrow Morrisons customers in the Midlands area will be able to order their Morrisons goods safe in the knowledge that a failsafe robot in Warwickshire will be loading up their order. They boast that you will even be able to determine the thickness of your meat slices in the virtual butcher.

Ooh. Just a trial period thing is it, I expect: No sir. It’s only the longest agreement in retail history, well it feels like it anyway. In the world of retail where two years is a lifetime Morrisons has signed up for, wait for it, 25 years. Like I say you have to take the long view with Ocado.

Get away! In one fell stroke, Ocado’s future looks bright again. Sir Stuart Rose, retail supremo, became chairman, a major UK retailer pays £200 million to buy into their vision and voila, the naysayers go curiously quiet.

Talking of naysayers, what, in a nutshell, is the innovation Ocado brings to the table? OK. Ordinary supermarkets started out by just sending staff round normal shops picking the stuff by hand but that is only doable while volumes are modest. As they grew the grocers developed dark stores.

Exciting. Is that where the Dark Lord goes? What a ridiculous idea. No, they are depots laid out as normal shops where human pickers go round with a trolley and get the stuff. Still inefficient, time consuming and not suitable for large volumes of orders. So then there were semi-automated warehouses with a mixture of robots passing the orders to pickers at high speed.

Yes, yes, but where does Ocado come in? Ocado operates fully automated warehouses at enormous cost of development. This is why in The Grocer magazine surveys of successful online ordering Ocado always comes top. Robots don’t read barcodes wrong and they don’t get tired. It would take another supermarket a few years and even more money to develop this same software so Morrisons has taken a proper gamble on this.

Now, correct me if I’m wrong but I thought Waitrose was the supermarket involved here: OK, awkward. Yes, Ocado does stock mainly Waitrose products. And with Morrisons it is simply running the warehouse for it. Ocado actually also have an own label range, tiny at the moment but it will grow and the Waitrose deal is only scheduled to run until 2017. Best to think of Ocado as really a technology company rather than a retailer who can license its software to anyone.

Ah, so in theory it wouldn’t have to be only food: Certainly not and they are very actively wanting to license their software services abroad to interested parties as well as expanding here at home. Steiner rules out branching out into furniture but says its pet products for instance have big potential.

I have a question. How does the online grocery market share shape up now? Well according to Mr Steiner his outfit has 15-20%, Sainsbury’s the same, Asda 10-15%, the independents like Abel & Cole 5% and the mighty Tesco 45%.

Hmmm, it was going well until that point. How is he going to change that ratio? Ageing customers for one thing. Ocado attracts the younger audience and if they stick with it as they age and the younger ones keep coming too then bob’s your uncle. The sound of humble pie being eaten, that’s what Steiner wants to hear.

What doesn’t he want to hear? Amazon goes on the attack with its food delivery offer.

Got it.

PCMS Group is a leading independent supplier of software and services to the retail industry; PCMS Store and Multi-channel solutions have been chosen by over 98 retailers including Arcadia, John Lewis and M&S.