Why 2020 has to be a year of delivery and execution for retail platform provider Ocado

Profile picture for user slauchlan By Stuart Lauchlan February 12, 2020
Summary:
2019 had some major ups and downs for Ocado; 2020 presents a fresh set of challenges as the firm seeks to execute on its promise as retail tech platform provider.

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You can always rely on Stuart Rose, Chairman of retail tech firm Ocado, to come up with a pithy summation of any given topic. Challenged to sum up 2019 for the company, he offers up:

A year of vision, a year of innovation, a year of resilience, a year of pragmatism.

It was certainly a year marked with incident, most notably the horrific fire that broke out at the firm’s Andover robotic warehouse, the knock-on effect of which is still being felt. On a more positive note, Ocado signed its long-mooted partnership with Marks & Spencer, resulting in Ocado Retail, while the Ocado Solutions arm signed up more of the long-promised international customers for its automated platform, including Kroger in the United States, Aeon in Japan and Coles in Australia.

It’s also been another year of heavy losses. The firm just turned in a pre-tax loss of £214.5 million for the year to 1 December, up from £44.4 million a year earlier. That loss includes £94.1 million of exceptional costs related to the Andover fire. On the other hand, group revenue rose by 10% to £1.76 billion.

So what’s ahead for 2020? The bottom line can probably be summed up as ‘delivering on commitments’. Or as CEO Tim Steiner puts it:

We're building for tomorrow at a pace.

That includes opening the first international automated Customer Fulfilment Centers (CFCs), for Groupe Casino in Paris and for Sobeys in Toronto. Both are scheduled to go live in the first half of the year, with Steiner commenting:

There are robots running around on those grids right now whilst we test the installation, the peripherals and the sanctity of the grid installation as well as the on-site software.

With Ocado heavily involved in working with clients on the rollout of the CFCs, the firm has continued to ramp up its tech skills base, with 350 new technology personnel coming on board in 2019. An additional London development center has opened, as has a support office in the US.

Robotics 

Particular areas of focus for 2020 inevitably include further enhancements to the core Ocado Smart Platform with robotic picking within the CFCs cited as a case in point by Steiner:

Picking today is around 50% of the labor in a warehouse. We have today live robotic picking of real customer orders in Erith [in Kent, UK]. We aspire, by the end of this year, for the performance of those picking sales to be equal to that of a human, meaning that we can swap out human pickers for robotic pick sales for a growing proportion of the range.

The first two sites, in France and Canada, will have a combination of the robots that are currently deployed in Erith. That's what's on their grids now testing and ready for go live. As they scale those sites, they'll have third generation robots that will be arriving during the course of this year. Kroger, should go live with probably 100% new robots….Predominantly, the rollout is going to be next-generation robots.

This year will also see further work on Ocado Zoom, the firm’s “immediacy delivery” offering, but don’t expect to see expansion of the trials around this to occur too quickly. Steiner explains:

We've been running Zoom now during the better part of the year. The first phase was to run the consumer trial. What we've validated is a real market opportunity in immediacy. The first site that we built in Acton [in London] is already operating at around 50% of the capacity we built it to do, and it's growing week-on-week. It’s significantly increased our market share overall in the catchment that it's operating in. And we've now got increased confidence that we can deliver the best offer and economics in the immediacy market.

What we're doing at the moment is proving the model. We're working on the innovation of our solution and how we'll install our automation into the solution to drive down the operational costs, both the labor costs in the facilities as well as the waste incurred. And we're exploring further options to optimize the technology even further to lower the capital costs and the operating costs beyond where we believe we can get to right this minute.

We're currently working on plans for a second site in London. In the future, we expect to roll out immediacy offerings through micro sites with all of our customers as part of the Ocado Smart Platform. So micro-fulfillment solutions to serve the immediacy missions in the markets globally.

M&S

Then of course there’s the tie-up with Marks & Spencer (M&S), with the Ocado joint-venture providing that retailer with the online ordering and delivery service that it wilfully neglected for far too long. It means the end of Ocado’s existing relationship with Waitrose, but the future with M&S is brighter, reckons Steiner, who doesn’t expect to see much customer churn at the shift in grocery provider:

Data suggests that it's a low single-digit percentage of customers who are passionate about Waitrose. We see a larger number of people who are passionate about M&S and don't shop with us today. So we expect there will be some churn, but we expect there will be a replacement from new customers who are more passionate about the M&S brand than they were about Waitrose.

He adds:

Working together with M&S, M&S are going to bring food innovation and sourcing at scale. Obviously, in own-label food, their sourcing power is double that of Waitrose. We’ll for the first time, get to see what these customers are doing in-store as well as online through integrated CRM. We at Ocado Group will bring the leading fulfillment operations with continuous technology upgrades as well as new profitable immediacy and same-day models to the mix. And Ocado Retail will develop their commercial and marketing abilities and expect to significantly strengthen their GM offering.

All of this will create new opportunities, more data and insights to act on at an unparalleled offer. So we expect to swap out the 4,500 Waitrose lines, replacing them with more than 4,500 M&S lines that our consumer research tells us that customers understand is a better-quality product, and our data is suggesting is at cheaper prices today.

My take

All told, there’s a big ‘to do’ list for Ocado in 2020 - and one that’s only likely to get longer. It’s shaping up to be potentially a tipping point year for the firm, one in which its status as a technology platform provider will be more robustly tested than ever before as it delivers on the international deals it’s taken so long to sign. For Steiner, there’s one thing that keeps him awake at night and that’s not balancing the business correctly:

I don't see a single risk, if that makes sense, or one thing. Obviously, it's complex to build in multiple countries at the same time, the amount of code that we're developing, the challenge of new robotic design and bringing down the ongoing engineering costs, keeping the clients happy. I need to be in 5 countries at the same time sometimes.

How 2020 is regarded at this point in 2021 will come down to one thing - execution. As Steiner observes:

Obviously, if we were sat here in 9 months' time and we haven't turned those sites on live for our clients in Toronto and in Paris, you need to be asking some very serious questions to whoever is sitting in this seat because it won't be me.