Delivering the future of retail - Ocado's game plan for 2021 assumes no going back for online grocery shopping

Stuart Lauchlan Profile picture for user slauchlan February 11, 2021
Ocado is an online grocery veteran and one now facing potential increased competition as rivals find that omni-capabilities are now an essential, not an option.


The boom in online grocery shopping during the COVID crisis has been well-documented, whether it be an upscaling of existing practices in Europe or the accelerated uptake of the practice by ‘virgin’ consumers in the US.

And the boom is showing no signs of going away - data out this week from NielsenIQ reports a 121% increase year-on-year as UK shoppers spent £1.4 billion on groceries online during January, £770 million of which was spent by first-time buyers.

An obvious beneficiary of this was online veteran Ocado. which last week reported quarterly retail revenues up more than a third on this time last year. The firm also turned in a full year pre-tax loss of £44 million, a timely reminder that the shift to online may be convenient for buyers, but has its own cost considerations attached for sellers. It isn’t easy to make a profit in the online grocery game - see Walmart for further confirmation.

That said, there’s no going back now, is there? From a shopper's point of view, the cork is out of that particular bottle. The trick now for retailers is to work out how to tap into the online model and make money in the process. Will it be via delivery or other digitally-enabled options, such as click-and-collect or curbside pick-up? And will the sector see increased automation of key processes, most notably at the back-end in areas such as product selection, to bring down overheads?

Given its two decades in the online grocery field, Ocado is well-placed to provide a view here and it was interesting to see the firm take a firmly forward-looking view during its latest analyst update, focusing on the shape of retail-to-come in the emerging Vaccine Economy. This is predicated on certain key assumptions, starting with the safe bet that millions of people have tried online grocery for the first time due to the pandemic and won't be going back to their old ways.

But they will become more discerning in where they place their business. The long virtual lines and wait times for delivery slots during the COVID crisis will give way eventually and factors other than availability will become more important. Customer experience will clearly be one such factor and Ocado is betting that having the right tech to support that is going to be a competitive differentiator, as well as reducing cost-to-serve, which in turn will be another key element in influencing shopper buying decisions.

Partner pickings

There’s a lot at stake here, argues CEO Tim Steiner, citing a potential £7.6 trillion grocery market, with £2.8 trillion of that coming from what Ocado classes as”key markets, ones with high GDP per capita and larger populations. If Ocado and users of its Smart Platform (OSP) tech have a 25% share of that market, that would represent an opportunity of £700 billion a year.

To date, those partners appear happy and the doors to their robot-powered Customer Fulfilment Centers (CFC) are opening up. Empire, Canada’s second largest grocery firm with 1,500 stores under the banners such as Sobeys, Safeway and IGA, first announced a partnership with Ocado back in 2018, one of the earliest international deals for the OSP.  Michael Medline, President and CEO, Empire Company - Sobeys, today says:

To say that 2020 was the right year to launch a grocery home delivery e-commerce business would be an understatement. E-commerce retailers around the world in retail and grocery have reported record multiples in growth, some that we didn't predict [happening] for years, especially in grocery….This past June, we were thrilled to open our first CFC and add our new online grocery home delivery e-commerce banner, Voilà, to our family of brands. Voilà has quickly become a trusted favorite for customers in the Greater Toronto Area in just 8 short months.

Our weekly on-time delivery score is 98.6%, and our order fulfillment score is 99.6%. Both of these metrics are beating the ambitious goals we set for this new business. Our Net Promoter Score is an extraordinary 87, and we are seeing extremely high customer satisfaction, positive word-of-mouth referrals and repeat rates. In my 2 decades in retail, having worked in hard and soft goods, I can tell you, these are best-in-industry metrics.

Meanwhile at US giant Kroger, all eyes are on the soon-to-open CFC in Monroe, Ohio as an important milestone in its partnership with Ocado. CEO Rodney McMullen says:

The Monroe CFC is a key step in our continued acceleration of our expansion to our national supply chain network to redefine the customer experience…We are looking forward to the opening of our next CFC after this one, in Groveland, Florida. It enables us to expand our footprint, enter a new market and serve even more customers.

We continue to invest and improve our e-commerce capabilities, focusing on cost-effective solutions. We've also built flexibility into the fulfillment ecosystem, which will be comprised of large CFCs like Monroe and Groveland, but also smaller and medium-sized sites as well. This will allow us to maximize penetration across all of our diverse markets.

Size matters - or it will 

McMullen’s reference to different sizes of CFCs is an important one when considering future retail fulfillment strategies. Size is going to matter.  By the end of this calendar year, Ocado’s schedule is to have 7 retail partners around the world up and running on the OSP, while getting CFCs opening up, says Luke Jensen, Chief Executive of Ocado Solutions:

2021 will be another stepping stone in the deployment of CFC capacity ahead of a strong acceleration in 2022. We now have a staggering 17 CFCs under construction worldwide. [This year]  will also mark the next steps in the development of the unique OSP ecosystem, allowing our partners to achieve maximum market penetration with the best economics.

In addition to offering our partners the most advantaged economics and range proposition with standard CFCs, smaller formats like mini-FCs or micro-FCs will allow to maximize customer reach and market penetration while in-store fulfillment allows rapid response to market demand and allows to reach low-density geographies. In addition to this unique breadth of offering, OSP also leverages unique technology advantages across fulfillment methods, like the ability, for example, to replenish small CFCs from larger ones. With OSP, we'll offer our partners the best performance across every single fulfillment method.

The smaller CFCs are a interesting development reflecting the ‘need for speed’ in an increasingly busy future market. Same day delivery or delivery with even shorter time frames is only going to be possible if inventory can be brought physically ever closer to the customer. Giant CFCs are crucial for the wider service enablement, but getting local is the key to faster delivery times. That means ensuring the mini-CFC concept is done correctly is crucial. Jensen explains:

What we've done with mini-CFCs is we've taken the technology that was developed for large CFCs, and we've managed to take it into a smaller footprint, say, £150 million of sales. This has the big advantage of being able to bring the full advantage of OSP technology to smaller catchment [areas]. Those would have previously been served through a spoke from a bigger site or through in-store fulfillment. What that means is it means customer benefits of shorter lead times and also economic benefits of the new formats.

And it’s possible to think even smaller, he adds, with micro-fulfillment centers (MFCs), used to support Ocado’s embryonic Zoom proposition. Zoom is a same day delivery service, first piloted in 2019 in one small part of London, allowing shoppers within a certain distance to place orders that can be delivered, in some cases, within an hour. That site is now being joined by a second one in an undisclosed area, with a further dozen prospects being scoped out within London. Jensen says:

Ocado Zoom has continued to demonstrate the opportunity to increase market penetration by serving ultra-immediacy demand within one hour. While larger planned shopping will always be most effectively served from larger formats, we see MFCs as a great opportunity to increase share of wallet and customer loyalty. Think of it as the convenience store of online retailing. 

In all this, stores won’t entirely go away, he adds, so in-store fulfillment needs to be factored into strategic thinking:

In-store fulfillment brings maximum flexibility to reach low-density catchments and to respond to short-term changes in demand. This is always going to be an important part of the platform in geographies like Australia or Sweden, where you have that mix of concentrated urban catchments with low-density large tracks of country. But what it has also proven highly effective for is responding this year, with Morrisons [supermarket chain], to the increased demand from COVID in the UK, by rolling it out in just a few months across the nation. By the end of 2021, we'll be live with in-store fulfillment with 5 partners and in more than 1,000 stores.

My take

The Ocado service remains impressive - even if my next available delivery slot is currently 3 weeks away! - and, having dabbled with a few other providers, still sets the benchmark standard. Tracking the progress of the likes of Kroger and Sobeys is going to provide some useful insight into how replicable this UK service level is. All the CRM tech in the world doesn’t mean you provide good customer service if your organizations isn’t set up to do so. The same may or may not be true of retailers and omni-channel enablement tech - a topic to be revisited later in the year. 

Consumer patterns will still vary around the world of course. In the US, retailer-operated delivery services are far more nascent than in the UK, while click-and-collect and curbside fulfillment are more predominant. How that balance shifts is an unknown variable and will depend on local conditions. Where I live, click-and-collect or curbside pick-up for a weekly grocery shop wouldn’t work, thanks to parking and loading restrictions, whereas in the US it’s far more feasible. Hence, delivery is far more likely to be the preferred option in the UK and large parts of Europe, while in the US and Canada, expect more fulfillment choices to be required. 

But whatever happens, COVID has made the case for online grocery capabilities to become a must have around the world, not just a nice-to-have, a case of digital disruption through necessity. The future lies this way. 

A grey colored placeholder image