August 20, 2020

UK summer tour: Talk with Ocado Solutions

Ocado home delivery scene (photo: Ocado)
Delivering the goods to your door step: Ocado.com
On the third part of our annual summer tour, feature page editor Mathias Himberg spoke per video conference with Richard McKenzie, Chief Commercial Officer of Ocado Solutions.

Parent company Ocado Group Plc, founded by former Goldman Sachs bankers Tim Steiner and Jason Gissing in 2000, is already the UK's largest online pure player. It has obviously been on a roll during the coronavirus crisis as the lockdown forced even the elderly to master the wonders of digital shopping.

But there is more to this success than an unexpected windfall. Steiner now calls Ocado a tech company as well as a food retailer, which is why Ocado Solutions is forging corporate partnerships with global grocers...

"There are weeks where decades happen"


Ocado CCO Richard McKenzie (photo: Philipp von Bruchhausen)
Only one way: Richard McKenzie
Mr McKenzie, how has Ocado experienced the coronavirus crisis so far?
There are decades where nothing happens and then there are weeks where decades happen. I'm afraid this is a quote by Lenin, so maybe this is not the best way to start an interview. But so much has just changed in the past few weeks.

The market share of online delivery on the British grocery market has risen from 7 to 13 per cent during the crisis. That was the growth of the last 20 years in a few months.

What does this mean for you?
I'll have to answer this question in two parts, given the double nature of our enterprise. For our online delivery service Ocado.com it has been a very significant challenge to deal with this enormous demand. At one point we saw a hundred times the traffic we normally have in our web shop.

Over the last quarter, our revenues grew by 40.4 per cent. The average number of orders per week in our fulfilment centre in London's Erith area grew from 80,000 to 110,000.

You could have grown even more, had you accepted new customers...
Indeed. At the moment we're still only serving our loyal customers. There has been some criticism about us being a bit inflexible in that respect. But the growth we've just achieved is probably higher than everybody else's, and the demand is just too high for us to meet at the moment.

So what are you doing about it?
We're ramping up the number of our fulfilment centres in the UK. We're working on three big projects, apart from the rebuild of the centre in Andover, which fell victim to a fire last year.

How about Ocado Solutions?
From the point of view of Ocado Solutions, the enterprise in which we enable offline retailers to perform online delivery, we had a lot of work to do, too. For instance, we have helped Morrisons grow the number of stores which are fit for home delivery and pick-up from about 30 to 277.

They use our fulfilment centre in Dordon near Birmingham and our software for in-store picking.

What will happen to all this big, sudden demand after the corona crisis has subsided?
We're convinced that the growth will be mostly permanent. Normally, when people start ordering online with us, they become very loyal customers afterwards. And our retail partners are impatient to do more online business, too. Their main question at the moment is: How quickly can I get things running?

How soon will German retailers also number among your customers?
Germany is an interesting market with difficult characteristics, given the high share of discounters. The country has been relatively slow to pick up on online grocery, but Covid-19 may change that. At some point we will come to Germany, but then our solution will be tailored to that market.

Why should retailers trust you with organising their online business instead of doing it themselves?
Online grocery is extremely difficult. Software and hardware have to fit together – we've learned that the hard way ourselves. Now we know accurately what's in our fulfilment centres. What's more, we offer a solution not off-the-shelf, but highly individualized for each retailer we serve. This is difficult to replicate for other players.

Anything to add?
In online grocery, you also have a wide range of products, including ambient and chilled items. You have to be very efficient and keep the waste low, as this is a low-margin business. Otherwise you won't make money.

So why has Ocado lost money for the second year in a row?
Ocado.com, our own delivery service, has been profitable for a while. Ocado Solutions is not, because we are investing enormously in the product. We keep ploughing money into that project to stay ahead of the competition.

Meaning Amazon?
Amazon does a superb job in nonfood retail, but it still has to make its mark in food. Lamps or books don't have shelf lives, after all. And at the moment it's still difficult to build a food basket with Amazon. Therefore, grocers who know their business still have an advantage over them. Our system, too, is grocery-specific.

However, Amazon has invested well in that area. And at some point of time they will work out how to do online grocery better. It's going to be a must for them.

But, if retailers partner with you, they have to pay your fees...
Yes, but we automate a lot of the labour in our fulfilment centres, so we lower their labour costs.

An Ocado customer fulfilment centre in Andover, southern England (photo: Ocado)
I, Robot: An Ocado customer fulfilment centre in Andover, southern England
Why did you exchange your UK business partner, food retailer Waitrose, for department store operator Marks & Spencer?
With Waitrose we merely had a supply contract and bought their own-label products. With Marks & Spencer we have a much closer agreement. Ocado.com is now a joint venture between the two of us. We are extremely excited with that, as Marks & Spencer have a lot of customers who don't shop online yet.

So there is an enormous opportunity to grow their online food business.

You already cooperate with other retailers. How well are these projects running?
British food retailer Morrisons is with us longest. We have helped them build their online business and the customer ratings are extremely high.

What about your other retail partner?
The Canadian retailer Sobeys went online with us on June 22; Casino in France did so on June 8. Kroger in the US will go live with us next spring, and ICA in Sweden in early 2022.

So Morrisons is your only practical example so far?
Bonpreu, a retailer in the Spanish region of Catalonia, is doing very well. With our help they have become the leading online grocer in their region.

But won't it be a nightmare for offline retailers to lose 10 per cent of their annual store revenues?
At the moment, yes. They'll have to change their bricks & mortar stores properly. At 10 per cent it will definitively become very difficult to pick items in-store. US organic food retailer Whole Foods still does that, and they get a lot of negative customer reactions for it.

Back in Britain, corona is causing an economic crisis, likely to be worsened by Brexit next year. To what extent will that dampen the prospects of online grocery?
We watch the negotiations closely, but the outcome is hard to foretell. We planned a lot last year for a number of different scenarios. We hope that the supply chains won't be interrupted.

But won't people in an economic crisis turn to discounters rather than online retailers charging fees?
Quite likely, the UK market will see some price pressure. But we are already price-matched to Tesco, who are price-matched to Aldi.

Maybe in some areas...
That's what you said. I say that we are competitive on price. Anyway, we see excess demand at the moment, so we are looking forward to welcoming new customers in. And even if the market share of online grocery declined a bit from the current 13 per cent, it would still be a massive market in which we continue to grow our share.

Don't delivery fees scare customers away?
Maybe some. But customers begin to value their time and like the convenience of online shopping. Personally, I don't enjoy one-and-a-half hours in a hypermarket, searching for products and queuing up.

Do you have any hint for our German readers how to prepare for Brexit?
I have to believe we will come out in a pragmatic place. Do I get worried that negotiations will get a bit wild? Yes. Do I believe there will be more bravado statements from the British government? I absolutely do. We've probably seen too many of them already.

But, at the end of the day, the economic interests of our country and the EU are better served when we continue to trade with each other. Funnily, corona gives us more room for a deal, as we've got enough problems already without ending up separated.


Read in German: "Begierig auf mehr online" by Mathias Himberg on pages 28-29 of Lebensmittel Zeitung, no. 34, 21.08.2020


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