Analysis: How Ocado plans to make up for lost time

However, the online grocer’s rigid model, based entirely around its automated customer fulfilment centres (CFCs) – coupled with the fact its Andover warehouse had been destroyed by a fire – meant it struggled to keep pace with the likes of Tesco and Sainsbury’s.

While the big four added online capacity at a rate of knots – Tesco more than doubled the number of delivery slots its offers to 1.5 million a week – Ocado has been hamstrung by a lack of warehouse space or a bricks-and-mortar store portfolio from which to fulfil the additional demand for ecommerce orders. 

Although the etailer has consistently been anointed by Kantar as the fastest-growing grocer in terms of sales throughout the pandemic, its market share grew just 0.3 percentage points year-on-year to 1.7% by the end of January 2021.

During the same period, online grocery penetration has ballooned from 7% to as much as 16%, according to Nielsen. In short: Ocado has not been able to keep pace with the market growth.

Ocado Retail chief executive Mel Smith sums up the retailer’s predicament during the pandemic: “We would have loved to have served more customers but demand significantly exceeded our ability to supply customers for most of the year, despite our colleagues working incredibly hard, delivering 40% more groceries from our existing sites.”

Smith also noted that consolidation of supplier ranges during the crisis “impacted our ability to supply everything that customers ordered”.

Although Ocado’s retail sales jumped 35% year on year to £2.2bn, the online grocer remained in the red, narrowing its pre-tax losses to £44m from £215m a year ago.

But founder and chief executive Tim Steiner is convinced Ocado can capitalise on the shift to online grocery shopping sparked by the pandemic not just in the UK, but internationally, where it has sold its online, tech and logistics capabilities to the likes of Kroger, Sobeys, Casino and Aeon. 

“The landscape for food retailing is changing for good,” Steiner insists. “As we look ahead to a post-vaccine world and a return to a new normality, Ocado is very well placed to enable our grocery partners worldwide to bring the best customer experience to market, responsibly, with high levels of hygiene and superior, sustainable and proven economics.”

But how will Ocado ensure it capitalises on that opportunity?

Focus on efficiency 

Driving efficiencies has been key to Ocado’s growth during the pandemic and will remain a central pillar of its plans for global grocery domination. 

Despite its warehouse constraints, Ocado was still able to increase capacity by 40% last year without adding any major new infrastructure. Steiner says Ocado was able to achieve this, particularly at its automated warehouse in Erith, by making its picking robots more efficient. 

He explains that gains were made by it robots “becoming more reliable over time, us becoming better at servicing and maintaining them, adding new software to make them more resilient and reliable, and us becoming more disciplined and structured in how we service them”.

Ocado’s three new UK CFCs in Bristol, Purfleet and Andover – the latter being rebuilt following the blaze in February 2019 – will be operational by the end of 2021, adding a further 40% capacity.

The business has also been working on a new generation of robots, which Steiner says are “more reliable and better designed”, to speed up the picking process. The first tranche of these machines will be installed at its smaller Bristol warehouse and will also be offered to international clients. 

Deputy chief financial officer Andrew Page predicts higher order volumes, more efficient robotic picking and the new capacity will allow Ocado to increase throughput by 20% and “achieve double-digit revenue growth” in 2021. 

More cost-effective warehouses 

Ocado has always been cagey about revealing the costs associated with building its giant automated warehouses but the bills associated with units like the 600,000 sq ft site in Erith and the 304,000 sq ft CFC under construction in Purfleet run into hundreds of millions of pounds and take at least two years to build. 

But the etailer-cum-tech-specialist is increasingly seeing opportunity in smaller, less capital intensive sites. Its first 150,000 sq ft mini-CFC will open in Bristol before the end of March, while it also plans to launch at least a dozen more micro-CFCs, measuring 25,000 sq ft, to service its Ocado Zoom one-hour delivery proposition. Its maiden micro-site in West Acton, London, is already running at full capacity such has been the take-up of the service during lockdown. 

Ocado Solutions chief executive Luke Jensen says this more diverse CFC offer will allow its retail partners to serve smaller customer catchments more efficiently. 

“What we’ve done with mini-CFCs is we’ve taken that technology that was developed for large CFCs and we’ve managed to take it into a smaller footprint,” he explains. 

“Those catchments would have previously been served through a spoke from a bigger site or through in-store fulfilment. With mini-CFCs closer by, that means customers benefit from shorter lead times and also economic benefits of the new formats.”

Jensen says the rollout of smaller warehouses closer to customers’ homes represents “a great opportunity to increase share of wallet and customer loyalty” and to “increase market penetration by serving ultra immediacy demand within one hour” – a market the likes of Amazon and Deliveroo are currently blazing a trail in.  

Picking prowess

Steiner has decried the store picking model as inefficient and overly costly in the past but Ocado is now offering that option to its international retail partners. Explaining the thinking behind the move, Jensen says picking online orders from stores played a “crucial” role in allowing UK partner Morrisons to ramp up its capacity during the pandemic.  

Ocado will offer its in-store fulfilment (ISF) proposition to five of its overseas partners across more than 1,000 stores by the end of 2021. 

Jensen says ISF is important for partners in countries like the US, Sweden and Australia, which have relatively low population densities. But he insists Ocado’s store-pick model will be different from the models used by competitors. 

He says Ocado will create “best-in-class tools” to make store pickers’ lives easier – using technology, for example, to map out the most efficient route that pickers can take around their shop. 

Steiner also says the acquisitions of US-based robotics firm Kindred Systems and robotic design and research business Haddington Dynamic have opened up opportunities for Ocado to expand its fulfilment solutions beyond grocery. 

Although Kindred Systems is helping Ocado solve “the grocery challenge” of automated picking and packing, it already offers automated fulfilment solutions to several general merchandise and fashion clients such as Gap and American Eagle. Haddington’s expertise in manufacturing robotic arms, meanwhile, will help Ocado improve the designs of its robots to work with a more diverse range of products.  

Steiner adds: “There are other markets for us like dense storage systems, for example, whether that would be in parts, in distribution, in general merchandise. For example, in Kindred Systems they have a large number of customers and over 180 picking arms – all of them outside of the food business.

“They’re robotic picking in general merchandise and clothing, so there are other areas of interest to that part of the group in the future.”

Ocado has already dipped its toe into other categories – it has worked with garden centre group Dobbies for the past four years and has also been helping retail partner Marks & Spencer fulfil some of its fashion and general merchandise deliveries. However, Steiner clearly feels there is more room for Ocado to play in this area internationally.

Global growth 

Ocado may have secured seven international partnerships in markets ranging from Sweden to Australia since 2017, but the business is not ready to rest on its laurels.  

Steiner estimates the global grocery market is worth $7.8trn (£5.7trn) and in the countries Ocado has identified as key markets – those with high GDP per capita and larger populations – total sales amount to $2.8trn (£2trn). 

By Steiner’s rationale, if Ocado can secure partners in all of those major markets, and those partners achieve a 25% share of grocery spend, that would represent £700bn in sales every year. 

However, Steiner admits fees from retailers licensing its technology will only grow if the share of the online market grows too. 

“At 10% online, our clients would put £100bn through our platform,” he says. “At 75% online, our clients would put £500bn through our platform, which means there’s a very big future fee opportunity of between £3.5bn and £26bn.”

While Steiner will not be drawn on which new markets it would be targeting, he says Ocado’s automated solutions were most attractive to partners in ”higher labour costs markets”. Asked about China, he says automated solutions in the region are becoming more attractive every year as its “labour gets more expensive every year”.

He adds: “There will obviously come a point where it [Ocado Solutions] becomes an attractive solution in those markets.”

Ocado may not have made as much hay as some of its grocery rivals during 2020 but if its renewed focus on efficiencies, more cost-effective warehouses and powering its picking model all bear fruit, it could yet go down as the year the business truly came of age.