Main content

What price health? Personal risk worries mean there's no going back from the online grocery shift, says Ocado CEO

Stuart Lauchlan Profile picture for user slauchlan July 15, 2020
Shoppers will have to balance the risk of going into a grocery store with the additional cost of online delivery - and that's good for Ocado's prospects, says CEO Tim Steiner.


We’re well used by now to tech vendors and users declaring that COVID-19 has accelerated years of digital transformation into weeks or months. Online grocery platform provider Ocado is no exception with CEO Tim Steiner declaring: 

Here in the UK, we've seen the market double in a few months. That's 15 years of growth in less than 15 weeks, and it's a global trend. In the US, the market year-on-year was up 6x. In China, we saw triple-digit sales growth.

Certainly the online grocery business has been an undeniable winner from the pandemic lockdowns around the world, although not without its own difficulties as demand ferociously outstripped supply and availability earlier in the crisis. But with those hiccups largely behind the industry now, Steiner believes that there’s no going back to the old way of doing the weekly grocery shop for most people:

The channel shift has been achieved despite constrained supply chains, despite capacity being difficult to bring online so quickly. There is more demand behind it and we've also seen that this demand is going to stay. There's a strong expectation that it's sustainable. There are stats from the UK, from the US, and from China that all support [the idea] that people who have tried the channel will continue shopping in the channel.  We know historically that customers that have done three to five shops online in a three to four-month timeframe historically stay with the channel. That is the hurdle you get over to make it more of your kind of common practice, to make it more of a habit. 

A contributory factor here, at least in the short term, will be ongoing consumer concerns about the virus and infection in public places. While supermarkets stayed open during the crisis as essential suppliers and all now have their own safety measures in place inside their stores, the human factor of, basically, not being able to account for other shoppers stupid behavior means that many people still have concerns about touring the aisles in search of toilet rolls. 

That risk factor is going to be helpful in making the shift to online stick, suggests Steiner, straying perhaps dangerously close to giving the impression that fear is a useful commodity for the bottom line:

Consumers have got a much better understanding of viruses and the transmission of disease and everybody is taking less risk than they did historically, some massively less risk, but everybody's some less risk, and it's about deciding where and when you want to take your risk? Do I take it to visit my family and friends for entertainment, for fun? Or do I take it to go to Tesco's and walk the aisles to get my groceries when Ocado would deliver them to the door and for a token incremental cost?  

In other words, how much are you ready to pay for your health? Steiner says: 

It's the token incremental cost high here that I think is key, because if you compare this to other markets where we're seeing very significant movements, like in transportation, where globally public transportation levels remain on the floor, but private car travel is back at pre-COVID levels or above in many markets, private car travel costs a lot more than public transport. Getting your groceries delivered to your doorstep does not cost a lot more than going to the hypermarket. In fact, if you include the cost of your own travel to the hypermarket, we believe it's cheaper.

Socially-distanced robots

As well as the retail arm, the other half of Ocado that’s set to do well is its Solutions arm, provider of the Ocado Smart Platform to third parties around the world, such as Monoprix and Krogers.  If there’s to be a sustained shift to online grocery shopping around the world, the Ocado Solutions proposition has considerable appeal, argues Steiner: 

You can look at store pick, micros, minis and standard warehouses, all available on Ocado Smart Platform. They all have different benefits and different drawbacks. No one model serves all cases, but the flexibility that we bring means that our partners can operate whatever they want on our platform.

Getting online delivers competitive advantage over rivals is the main argument, with Steiner pointing to Ocado Retail’s own experiences in the UK market to make his point:

The more the Tescos and the Sainsbury's and others grow in this channel, the happier we are. We have always managed or found it easier to acquire the customers of Tesco Online or Sainsbury's online businesses than their bricks and mortar businesses. The way we look at it is that they have helped us to persuade that client to shop online. Now we only need to show them that we're better online than Tesco's and Sainsbury's, which we always have been.

The use of Ocado's famous automated warehouses also has clear appeal in a socially-distanced working world, he suggests:

It's important to understand that 50% of the human capital inside a warehouse is picking, transforming that to robotic pick would enable everybody working inside those warehouses to be twice as productive…robotics also benefits in a COVID world in terms of having less people in the workplace, less people through the doors for changing rooms, the restaurant facilities, and also to help our clients customers to understand that their food hasn't even been touched by human. 

He adds:

Our target for this year end is for a robotic pick cell to have equal or greater efficiency than the human picking. So, we think we can match the human pick speed in a robotic cell. That robotic cell may actually have two robots in it, but will be the same footprint and the same pick station that used to be operated by one human.

All that begs a big supply-and-demand question at this point. Building out a Customer Fulfillment Center (CFC) currently takes about 18-24 months if it’s a ‘greenfield’ build. The issue then becomes how Ocado speeds that up and develops the capacity to meet the tsunami of demand that it’s predicting will be coming in a post-COVID retail market. There is presently commitment to build out 54 CFCs around the world, Steiner says:

We do expect our clients to ramp facilities much faster to clients that were previously looking at two to three years to full capacity or three to four years to full capacity. I would fully expect them to kind of ramp them to 12 to 18 months on average, obviously depending on what geography they open them in, whether they've had existing bricks and mortar…whether they've got an existing e-commerce business there. 

Overall, he strikes a more sober note of caution compared to his wider bullish predictions:

We're working at accelerating the speed with which we can give a greater capacity. Obviously, in terms of warehouses going live, I wouldn't expect any additional ones in 2021. We might see somebody add something that would be capable of being built in 2022. I think we'll see more warehouses going live in 2023 than we did before. So it's an acceleration of the pipeline.

But socially-distanced robots take time: 

We don't have several thousand robots sitting in a warehouse that we can just ship to somebody and particularly, because we're just about to manage the launch of the next generation of robots, we didn't want a whole load of the previous generation of robots sitting on a shelf somewhere. So, it's not as easy as we'd love it to be.

My take

Back in February, diginomica said that 2020 had to be the year in which Ocado delivered on its hype and promises with Steiner at the time boldly declaring: 

We’re building for tomorrow at a pace. 

A few weeks later as lockdown kicked in in the UK, Ocado’s service delivery capabilities were put to an unprecedented stress test. The firm was largely successful in managing a crisis situation. While as a long-standing customer, the inability to get a desired delivery slot became rapidly irritating, there were good reasons for that initial disruption for which Ocado itself could not be blamed. Communication with customers throughout the past few months has been simple, but effective. I’m waiting for my latest order to come through the door this afternoon, so it’s unlikely that churn is going to be a problem for the firm, although the ‘loyalty bump’ of shifting from the existing Waitrose partnership to the new Marks & Spencer one has yet to be accounted for.

All told, I could have done with Steiner toning down the enthusiasm around the channel shift to online that came, in my personal opinion, a little too close to sounding inadvertently like glee about the opportunities presented by a macro-situation that’s seen thousand of people die. But his predictions on the permanence of that shift sound credible enough at present and let’s face it, virus outbreaks at local level or a second global wave are likely to make that the case for some time. We’re a long way yet from real world shopping returning to any form of normality.

So, at the halfway point of 2020, has Ocado delivered? Yes. It’s just a crying shame it took a bloody pandemic to give it the extra bump it needed. 

A grey colored placeholder image