All of the kind of COVID benefits of shape and basket size have unwound.
That stark assessment of the online grocery market from Tim Steiner, CEO of Ocado, shouldn’t perhaps come as a surprise, but it does represent a bump in the road in terms of the firm’s strategic thinking.
Back in February 2021, the company was confident that there was no going back for online grocery shopping which was still riding the high of the pandemic-enforced shift in consumer behavior.
Flash forward a year to February 2022 and Ocado’s quarterly losses had tripled, a sign of what was to come last week as inflation and the overall cost of living crisis kicked in to take its toll on the company’s business. Consumers are tightening their belts and that’s hurting.
Back in February Steiner pitched a ‘thinking long term’ approach to the market, building on Ocado’s hugely ambitious Re:Imagined plans that had been unveiled only weeks earlier. He takes a similar tack today, although there was an interesting comment made in the post-results conference call to the effect that the firm is approaching “our peak levels of technology spend”.
Those tech costs currently stand at £161 million in cash spend, but it’s money well-spent insists Steiner as the automation capabilities that Ocado can offer partners is the selling point:
I've had comments from other partners where they've got a couple of other bits of automation in their business, and they said they've never seen a site, or any site, ever go live like these, with the automation just working. And whilst they might have other challenges, which we'll talk about in their businesses and stuff, they never hear the automation is not working or the automation is not capable or the software delivers the wrong box or whatever it is. So they are phenomenally reliable, predictable, do what they say on the tin and capable of significantly outperforming the service level agreement kind of productivity levels and throughput levels that they signed up for, which, again, they’ve never seen in automation in this space.
In fact, he argues, partners (and prospects) remain “incredibly enthusiastic and waiting for installations of things that are coming” as part of the Re:Imagined innovations. He cites a particular case in point:
One of the challenging things at the moment is working out where you put the first robotic pick arms and where you put the first automated frame loading machines. We’ve not only had to design an automated frame loading machine that will go into future sites and take out that most laborious kind of job, but also how we make one that can fit the footprint in all the existing sites despite the fact that, obviously, when we started envisaging it, when we built those sites, we weren’t envisaging that machine type of thing. So the latest version of prototype that’s going to go into production will now fit all those existing sites
Better for all?
Ocado Re:Imagined is just better for everybody, he adds:
It’s technology at its best, where everybody is a winner. The planet is a winner because we need smaller buildings that therefore have a smaller footprint, and we use less energy that has a smaller footprint. Our clients are winners because their economics are materially improved. You’re talking 30% to 40% reduction in labor costs because you’ve got over 300 UPH, up from 200 in the current version. And bear in mind at 200, that’s when we say given the inbound efficiencies that we have as well with direct delivery. We’ve historically said we’re at 15 minutes for an order going out the other side of the warehouse compared to about 74 minutes in a traditional bricks-and-mortar business operating as an online retailer. We’re now taking that 15 minutes to sub-10. Obviously, there’s only 9 a bit minutes left to go for, but we’re going to continue working on them.
There’s already been a significant reduction in installation time for Ocado’s tech, says Steiner, down from 10 months to install, to looking at five months for future projects:
People think that we take a long time. It’s usually the building footprint that takes a long time. Our own kind of install time for a building that can do £0.5 billion of run rate capacity is now looking like about five months. And if there’s an existing building, the time to prepare it for us to come in will be much quicker. And the new equipment is much more friendly to existing buildings and standard kind of building specifications.
As more partners sign up with Ocado, a sort of club has begun to take place, with everyone sharing information and experiences with one another. Steiner says:
What’s really interesting is that we have encouraged our partners to work together with us. We’ve created the club and we’ve created a series of areas of focus within it. So there’ll be e-commerce forums, there’ll be logistics forums, there’ll be supply chain forums and stuff like that and the work that’s going on between them is amazing. We had a conference a couple of months ago now called Beyond. There were well over 100 people here, some people from all of our clients around the world. We had left a couple of prospects in the room as well. Maybe we should have added more. The energy there was palpable. It was phenomenal.
One of our clients had gone to visit two of our clients. One of our clients, not yet live, had got themselves invited to see two of our clients, one who had been live for over one year, one had just gone live, and they’d gone there to pick up any learnings and stuff. That kind of collaboration, they all think is invaluable.
OK, so that’s the positive spin from the CEO. But there’s no escaping the current pressures in the market and the impact that short term pressures will have on longer term delivery plans for Re:Imagined. Steiner admits:
Global supply chain is difficult at the moment. So we sit and have to decide how many of the 500 Series bots we’re going to order out for the next 12 months prior to the launch and the ramp-up of 600 Series bot production. Before, you could have done that with, say, a three-month lead time and now you’ve got to do that with at least a one-year lead time.
So it’s a bit harder to operate any business that involves physical goods that are manufactured from multiple components around the world today than it was three years ago. I think we’re doing a great job handling it. But if you’re not involved in that type of thing, and you don’t realize how much more complicated the global supply chain has got, it’s worth flagging. But I think every business probably sits here and flags that as well. It doesn’t keep me up at night, but it is obviously challenging.
Meanwhile away from the platform tech, Ocado Retail has its own issues now that the Vaccine Economy is kicking in and people are back in the physical grocery stores. Steiner pitches the current reality as being one of finding a new equilibrium:
[Ocado Retail] obviously had, from a profitability perspective, enormous tailwinds through COVID in terms of bigger basket sizes, in terms of relatively unlimited demand and in terms of people willing to take deliveries at 11 o’clock on a Tuesday night. We’ve moved back to a normalization in terms of shape of the week. It’s come back in a different way. There’s more [orders] in the morning than there was before. People are a little bit less willing to take the orders on the wings very slightly than they were before. So we’re doing work in terms of re-balancing the labor and having more overlapping shifts.
And you’ve seen basket sizes come down to their historical levels. At the same time, you’ve got the cost of living crisis that is driving some consumer behavior in terms of slight trading down. So we’ve seen average item prices underperforming inflation on our average items by about 30% of the inflation. So we see that. The positive thing is that we’re seeing increasing productivity in the sites and in particular, in the new sites dramatically outperforming the historical ones. So as we keep growing that is a big benefit.
But that earlier comment about the disappearance of a lot of COVID ‘benefits’ hangs in the air, although Steiner’s glass is still very much half-full:
What it has also left is more customers in the overall online grocery market…I’ve described for many years now…if Tesco’s and Sainsbury’s have persuaded someone to move out of going doing the shopping themselves in the store and move online, we’ve only got to come along and say, “Look, actually we do this better’ as opposed to having to persuade somebody who shops in store at Tesco. They want to shop online and they want to do it with us.
So, when we’ve looked, the over-indexation relative to the market of our acquired customers being from our competitors’ online business is dramatic. And therefore, we think we’re not nuts to believe that there’s rich seams out there to go and mine in terms of new customers. And with Re:Imagined and with some of the enhancements to code stuff that’s coming down, the proposition is going to improve. And over the next few years, it’s going to improve materially.
Ocado’s technology offerings are tried-and-tested and those partners that are signed up are evangelical in their support for the platform. Re:Imagined, as we noted before, is a bold statement of intent with revolutionary potential. But inevitably there’s still a lot of ‘jam tomorrow’ about all this - and that’s been a long term trait of Ocado that has frustrated the stock market. Steiner talks about reducing delivery times. Some more ‘jam today’ is what investors are likely to be looking for in the second half of the year.