ASOS and Ocado - why warehouses matter in an e-commerce retail world

Two UK retail e-commerce providers provided a timely reminder this week of the importance of the physical infrastructure needed to fulfil online service provision.

Online grocery platform provider Ocado turned in 11% growth figures yesterday, coming only weeks after it secured the hugely lucrative deal to provide Marks & Spencer (M&S) with an online grocery service. But the good news was overshadowed by the knock-on effect of a fire in one of its robotic warehouses.

The fire at Ocado’s Andover Customer Fulfilment Center (CFC) in early February left Ocado restricted in its ability to meet demand and knocked about one percent off the sales total for the most recent quarter, according to CFO Duncan Tatton-Brown. But he was keen to downplay any long term impact on Ocado’s operational capabilities as extra resources are put in at the firm’s Erith warehouse. But damage has been done, for example, to the robotic picking arm in the Andover center:

Clearly with the fire we have lost that arm. But our computer room all the data storage and all the software was held in a computer room which was adjacent to the building and was untouched. So, we've lost none of the data, none of the software, none of the learnings. So, there is no significant delay But of course it may take a few months before we got to installing a new robot arm in Erith to continue testing and developing that capability in Erith. So it will be some delay, we don't know exactly yet, but some delay.

As to the cause of the fire, Tatton-Brown won’t be drawn just yet:

In terms of learnings, we were pretty clear on the cause of the fire within 24 hours and we've had an independent examiner looking at it, and they come up with some draft conclusions and some draft recommendations. But I have to say that…we’re not going to go through them now until that final [report], because I don't think it's in anybody's interests enough to share them until it's finalized. That's why we're confident that the changes are minor and there are no significant implications.

On a brighter note, the firm’s new Zoom delivery service that has launched on a trial basis in West London has shown positive initial results, he added:

Although, it's only being a few weeks early indications with respect to demand about these sites are encouraging, and we received positive feedback from customers on all elements with that. We will continue to learn more over the coming month as we refine the offering for customers. We believe the Zoom is capable of being a sustainable and profitable solution, significantly increasing the addressable market in the UK.

Investors displayed a sense of ‘keep calm and carry on’, sending the Ocado share price to a record high, justifying Ocado chief executive Tim Steiner’s view that the fire has been an unfortunate blip:

The fire has been a setback, but it will be only a temporary one. Over the last few weeks, our teams have been working hard to minimise any disruption to our customers and we will build a state-of-the-art replacement facility that reflects all the innovations and improvements we have made since Andover opened in November 2016.

At the same time we all remain focused on delivering customers the very best service, quality, choice and value. Our commitment to these objectives underpinned the underlying progress we made in the quarter. With the joint venture signed with M&S at the end of February, Ocado Retail has never been in a stronger position to lead channel shift while constantly setting the bar for excellence in online grocery in the UK. We are looking forward to the future with excitement and determination.

Crash

Meanwhile fashion retailer ASOS struggled after a new $40 million distribution center in Atlanta struggled to cope with demand that was 3 to 4 times greater than expected. This in turn resulted in the hugely embarrassing decision to pull planned marketing and promotions a mere 3 days after the much-publicised new center opened its doors.

CEO Nick Beighton tried to put a positive spin on this, arguing that the customer demand that caused the issues was “encouraging for the longer term” and insisted that the fallback plans had been successful:

During this time, we suspended US marketing promotion and extended the delivery time to allow the backlog to be cleared and our Barnsley warehouse picked-up demand and so we're happy with the backlog resolution. Our operational performance was resolved in four weeks and is now being normalized, and we're accordingly started to restore the delivery times and begun to operate our US promotion customer acquisition activity again.

But there are clearly questions to be asked about why critical back-end infrastructure wasn’t able to cope with demand that was clearly under-estimated. Beighton says:

I wouldn’t call it necessarily an execution issue to say. What happened is when we cut over in the beginning of February we planned a moderate sales growth. But that sales growth that we planned was outstripped by about a factor of 3 to 4 times. And quite simply, it surprised by the level of demand…The software solution was fine. It was simply the level of capability we had on the ground with some 700 people couldn’t play with the level of demand that we experienced.

So after three days when we experienced significant uplift and uplift that I have not seen so great in nine years, we had to suspend our promotions and marketing to restore and recover the backlog situation. We then switched back over to Barnsley [England} to pick-up some of the demand. So we’ve cleared the backlog. That was kind of what happened. So I guess if you call that execution on one level, but actually we just didn’t expect that level of demand with that pace of change.

My take

Ocado has made so much of its reliance on its CFCs and the bleeding-edge tech within that the fire could have been disastrous in terms of investor confidence. But the firm has managed this particular crisis well. Barring some short term niddle-class horror at not being able to order the weekly kale and quinoa, there’s no reason to assume that there will be any long term impact. The M&S deal is waiting round the corner and while there are still questions about how that rolls out in practice, the omens remain good.

ASOS had a harder story to sell. Beighton says that a ‘what we would have done differently’ aspect would be to have deployed 1000 people in the US warehouse rather than 700, but in reality this smacks of a major midjudgement of demand and planning more than anything else. The shortage of bodies on the ground is just one facet of a wider problem. If the firm’s already ambitious US expansion plans are to succeed, the UK firm is going to have to up its game here and take on some genuine learnings from this chaotic situation.

For every e-tailer it’s a useful reminder that the flashy front end isn’t worth much if the back end engine room isn’t up to speed. Or in other words, you can have a lovely jacuzzi, but if the plumbing isn’t there, you get no bubbles.