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Brexit, Amazon - no worries, says Ocado CEO

Stuart Lauchlan Profile picture for user slauchlan June 29, 2016
Summary:
Online grocery platform Ocado isn't about to be fazed by the twin threats of Amazon or Brexit, says CEO Tim Steiner.

 

ocado

If Amazon Fresh wasn’t enough to scare Ocado, Brexit isn’t going to.

Twin messages with specific resonances for the online grocer. Firstly there’s still scuttlebutt about Amazon making a takeover bid for Ocado; secondly, Ocado’s chairman Stuart Rose was one of the leading lights of the Remain campaign.

Rose’s post-Brexit attitude this week is to note that:

We live in interesting times, I’d say that 50% of what happens to your life is not what you plan, it is what somebody else does to you and we’ll see what happens to us in terms of the UK PLC over the next few weeks and months, but uncertainly of course is not something that anybody likes. 

We remain confident about our IT, we remain confident about our intellectual property, we remain confident about what we do and how we do it well and we remain confident about the opportunity for us to sell the OSP (Ocado Smart Platform) further on.

The OSP is Ocado’s proprietary online retail solution that it sells to third party retailers, most notably Morrisons in the UK. It’s seen as one of Ocado’s big IP assets and as such, CEO TIm Steiner is not keen to discuss pricing models or fees in public, becoming notably irritated with analysts who will insist on asking him about this.

As Ocado yesterday announced an improvement in half-year pre-tax profits of £8.5 million, up from £7.2 million year-on-year on revenues up 15% to £584.2 million, he said:

We're not disclosing our costs of providing the platform and therefore the margins. Obviously the key from our side is the more scale we can put to the platform the cheaper it is for us to operate it. The first billion pounds that one puts through a technology part of the platform, has got significantly higher costs from the next billion pounds, because one doesn’t need to keep replicating the software when buying more processing capacity. If the software was designed, as it has been designed to run for multiple platforms, to run for multiple retailers there is not a lot of extra work to create the new revenue incidents.

Retailers who do tap into OSP get a lot of bang-for-buck, he insisted:

The platform includes not just the capital and depreciation of the equipment, the flexibility that we’ve put into the platform, but also includes the servicing and maintenance of it, also includes all the software, all the upgrades, all the running costs, all the cons, all the network rooms and server rooms in the warehouse. So there is a lot of costs bundled into that fee making that fee very-very competitive for what it is.

Death by Amazon

Steiner went further, boldly claiming that OSP is unique in its capabilities:

I think it’s entirely impossible to say how does it compare to any equivalent product, that it has no in equivalent product.  I don’t think launching, ranging your products in Amazon’s offer or even listing your products in Amazon’s marketplace can be compared. One is an Amazon customer, [with] Amazon owning the customer data, Amazon owning the strategy of the retail business. OSP is your own business as a retailer.

He pointed to the Morrisons relationship as a case in point:

So Morrisons is Morrisons business. Ocado does not own the data of the Morrisons customer, Ocado does not set the pricing of the Morrisons proposition or even the decisions Morrisons makes. So they want one hour slots or three hour slots, so they want our promotion today, or do they not want to have a promotion today but they want to charge for delivery pass, they don’t have delivery pass - it’s Morrisons business. They own their strategy, they own their customers, they own their direction and they own it for the future.

This is in stark contrast to those retailers who decide to use Amazon as a channel, then find that Amazon rolls over and squashes them, he argued:

Going on to the Amazon marketplace for many retailers has been poisoned chalice -  initially increased sales and then Amazon have moved into different areas and kind of crowded out that retailer.

But Amazon has now launched Amazon Fresh in the UK and those rumors that Ocado would be a prime and logical takeover candidate for it, if it’s serious about the online grocery market, just won’t go away. Steiner was on equally bullish form on the launch of Amazon Fresh:

We’ve seen absolutely no impact from the launch of Amazon so far. They’re in 69 of our post code areas. That represents a small percentage of our sales, but we are monitoring that very carefully. We have seen absolutely no impact We hope that they will help to grow the overall market, which obviously online is still a single-digit percentage of the overall grocery market. Last week we were trading exceptionally strongly in the areas that they’ve launched into.

We aim to be hopefully the fastest grower in the market. We’ve outgrown the Big Four on their online operations for a period of time now and we’d expect to carry on doing that. We’ll see what Amazon does in terms of growing or creating a presence in the market.

He pointed to statements from Tesco last week to the effect that it intended to cut back on subsidising its online operation. This is significant, reckoned Steiner:

It’s an interesting point for them to make given how much profitability they’ve claimed that business has made over the years. So it’s strange that suddenly, it’s seen as having to provide a subsidy to it. But maybe it will give us more opportunity to grow.

Brexit

As for Brexit concerns, Steiner sees a potential positive impact when it comes to selling OSP into the European retail market:

In terms of selling into Europe, a number of the conversations we’re having are with retailers working in the EU. I don’t believe that a Brexit that will force any of them. I do believe we will have the right to sell products into the EU and possibly even deliver most of that infrastructure into the EU,  prior to any changes actually occurring in the EU. I don’t believe that we won’t be able to service and maintain or deliver software from the UK into the EU. If we can’t do that, this country is going to have a lot more problems than even we’re envisaging now!

The slight sterling weakness,  which is a huge sterling weakness against the dollar, but isn’t as huge if you look for the kind of the trading history versus the euro, it’s just making a slightly more cost-effective for those retailers. Their item prices in euros isn’t being effected and their OSP fees are slightly lower.

But given Ocado’s dependence on up-to-the-minute technology innovation, there must be a concern around a potential skills-sourcing crisis post-Brexit. Again Steiner seems phlegmatic:

In terms of increasing our IT headcount, the real growth at the moment in our IT headcount actually is in our newer overseas offices, that would be Wroclaw, Sofia and Barcelona. Therefore, they are unaffected in their recruitment.

Ocado isn’t trying to hire UK nationals, he added, although it does send UK managers out to manage some European operations:

We’re assuming they are going to be allowed to work there, but if they weren’t for any reason, we would deal with that fact. But they are not going to be affected in their ability to recruit people.

We do have a very significant number of lower skill level employees, team members in our business who are not UK nationals, working in both of our facilities, a number of whom are EU nationals. I don’t believe that whatever negotiation we get into is going to mean that we are going to have no access to labor in this country.

We are far from the only employer in the UK who relies on non-UK national employment to operate a business. Clearly for the economy to carry on functioning, we’re going to need to carry on both encouraging those nationals to remain here and encouraging more to come as well.

My take

As a former Ocado customer - until a recent incident with an aggressive delivery driver and the subsequent soggy customer services response to that incident cost the firm my loyalty  - I’d always found Ocado’s web site to be the most functionally-rich of all the online grocery platforms.

Steiner’s rather prickly response to being questioned on the post results analyst call about the pricing/fees for OSP wasn’t hugely impressive, I have to say, but then again, this is clearly seen as the prize asset for the firm. The casual dismissal of the Amazon threat though is something that will come back to haunt.

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