Ocado – Changing Grocery Shopping in the UK
In the UK, an online dedicated grocery store founded in 2005, disrupted an industry generating £179B annually . The Institute of Grocery Distribution estimates that by 2019 sales from convenience stores, discounters and the internet will overtake superstores and hypermarkets for the first time . How is this happening?
Ocado was founded in 2000 with the mission of providing better service, value and choice to customers[i] buying groceries by creating the UK’s best online supermarket.
While this seems like a novel idea, around 1910, Londoners were enjoying “goods from all around the world” delivered to their doorstep and ordered by telephone in quantities as deemed fit by the customer.[ii] The war and the shift in consumer tastes have made supermarkets the go to place for grocery shopping.
What is Ocado doing that’s different and disruptive? Smart use of technology, better operations than traditional supermarkets and… more smart use of technology.
How Ocado operates:
Customers place an order online or via their mobile application and choose a time slot for deliveries. Groceries are delivered in hourly time slots by drivers using Ocado owned refrigerated vans. Products are always fresh and delivery slots always respected. Ocado has the capabilities to deliver other retail partners’ orders as well as the ones placed on its platform.
They are simplifying the operating model for a “traditional” retailer, by delivering goods from one of its 25 warehouses and distribution points directly to its customers[iii].
Ocado’s use of the latest technologies:
Ocado does two things extremely well: being at the forefront of technology for collecting orders and creating a state of the art system for fulfilling orders.
When the iPhone became a big deal in 2009, they created “Ocado on the Go”[iv], becoming the first UK supermarket with an iPhone app. Just a year after, they launched a service enabling customers to order by voice.[v] Most recently, they developed the world’s first grocery shopping app[vi], which seamlessly integrates with Ocado’s online and mobile app systems, allowing customers to place instant orders, complete orders across all three devices and, most importantly, check out in under 15 seconds.
They have developed in-house systems for receiving, putting away and managing stock, picking and organising orders, loading delivery vehicles, routing and delivering orders. This is how they have managed to achieve the lowest inventory and product waste level in the industry and a smaller customer orders delivery fleet size.[vii] However, their latest stint is building a modular wireless warehouse automation platform called Ocado Smart Platform[viii], which uses Artificial Intelligence and robotics[ix] and maximises warehouse efficiency, reduces the need for human interference and speeds up orders picking, preparation and delivery. Given its potential in the retail industry and other ones (construction sites, factories), they are selling the system to interested parties.
If you’re thinking this sounds too good to be true, you might be right. As of mid-November, Morrisons, UK’s fourth largest supermarket, announced it will start operating online and deliver using Amazon (Amazon Fresh does not exist in the UK yet)[x]. With Amazon’s competencies in logistics and Morrisons’ very competitive pricing, this partnership is the first one which presents a real threat to Ocado’s business.[xi] Despite the negative reaction of the markets to these news, I believe Ocado has the potential to stay relevant by:
- Differentiating themselves from Morrisons by offering a wider array of products, catering for wealthier and more price sensitive customers (Morrisons’ target market).
- Creating exclusive partnerships with chefs and nutrition experts for unique product offerings.
- Creating exclusive partnerships with designers to create unique household goods and kitchen utensils.
Ocado did not have the first mover advantage when it started operating in 2000, but it has managed to become relevant and thrive in the past few years. Given the latest consumer trends[xii], it is expected that competitors will try to close in and get some of Ocado’s market share. The only way to survive is to keep innovating and always exceeding customer expectations.
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[i] Ocado Corporate Website, http://www.ocado.jobs/locations/, accessed November 2016.
[ii] John Maynard Keynes, The Economic Consequences of the Peace, 1919, New York: Harcourt, Brace, and Howe, Inc.
[iii] Ocado Corporate Website, https://www.ocado.com/webshop/displayContent.do?category=information3&page=iphone, accessed November 2016.
[iv] Ibid.
[v] Paul Skeldon, “Ocado Android app allows mobile grocery shopping using voice”, Internet Retailing, 19 April 2010, http://internetretailing.net/2010/04/ocado-android-app-allows-mobile-grocery-shopping-using-voice/, accessed November 2016.
[vi]Veebs Sabjarwal, “Ocado Technology launches world’s first grocery shopping app for Apple Watch”, Retail Gazette, 23 April 2015, http://www.retailgazette.co.uk/blog/2015/04/ocado-technology-launches-worlds-first-grocery-shopping-app-for-apple-watch, accessed November 2016.
[vii] Ocado Corporate Website, http://www.ocadogroup.com/who-we-are/strategic-objectives.aspx, accessed November 2016.
[viii] Lianna Brinded, “Ocado created the most incredible world transforming machine controlling tech”, Business Insider, 9 February 2016, http://www.businessinsider.com/ocado-and-cambridge-consultants-ocado-smart-platform-launch-2016-2, accessed November 2016.
[ix] Paul Clarke, “How Technology is Transforming Retail”, Harvard Business Review, 15 November 2016, https://hbr.org/sponsored/2016/11/how-technology-is-transforming-retail, accessed November 2016.
[x] Sarah Butler, “UK’s major supermarkets decline for first time this year”, The Guardian, 28 June 2016, https://www.theguardian.com/business/2016/jun/28/aldi-lidl-asda-supermarket-sector, accessed November 2016.
[xi] Laura Fedor, “Ocado shares slide as Amazon and Morrisons extend delivery tie-up”, Financial Times, 16 November 2016, https://www.ft.com/content/ff506424-abd9-11e6-9cb3-bb8207902122, accessed November 2016.
[xii] Graham Ruddick, “The Dramatic Changes in Supermarket Industry”, The Telegraph, 8 April 2015, http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11522968/Five-facts-that-show-the-dramatic-changes-in-the-supermarket-industry.html, accessed November 2016.
Hi Anca – love the post and international perspective! I’ve only used an online grocery service once (Instacart) and wasn’t particularly impressed. The driver got very lost trying to find my apartment, called me numerous times, eventually found my place but then delivered 2 bags of groceries that were mine and 2 for another customer and had to come back to fix his error. The hassle was such that even though the *idea* of grocery delivery sounds great, the experienced made it significantly less convenient. How does Ocando ensure consistent and positive customer experiences? Are their drivers working for Ocando full-time? If so, I could see significant advantages to training and consistency (I don’t think InstaCart has enough of a customer base to employee folks full time and as such, I suspect many drivers are learning as they go).
Great post Anca! I think this is the future of grocery stores and I personally don’t know that I’ll ever go back to stepping foot inside a grocery store unless absolutely necessary (Avid user of Amazon Fresh here). I think the threat of competitors is real since there is nothing seemingly proprietary that can’t be replicated by another grocery provider. I think they can find ways to differentiate themselves by engaging in strategic partnerships. For instance, if they were able to partner with the equivalent of a Trader Joes I would be 100% loyal to Ocado. The assortment of products that TJs offers is so unique, reasonably priced, and most importantly beloved by millenial consumers.
Nice post! I think the benefits to the customer are amazing and cannot be questioned. I think the supermarket side of the equation is the interesting one – is it actually more profitable for large the supermarkets to operate a delivery model rather than stores (where essentially the customer self-covers all the transportation, bagging and picking costs). I see how Ocado created value for itself by filling a gap between the supermarket and the customer, but I wonder if due to very different business and operating models, we will see the emergence of an online-only supermarket (with no brick and mortar stores) in the UK?
Awesome post! I remember using their service when I lived in London. Considering operating complexity, though, and competition from the likes of Amazon, I think the only way for them to succeed in the future is to be acquired (as merger rumours spread now and then).
Anca,
Wonderful post! I am always excited to learn about a new international food company. You went into the competitive advantages that Ocado has but also mentioned an entry of a major competitor in the grocery delivery space. If i was Ocado, I would be very worried about Morrison’s and their recent partnership with Amazon. What makes the grocery delivery bubble in the developed western world so interesting is that the marginal gains it has made in innovation have resulted in massive value add tot he customer and has invited greater and greater funding interest. As you mentioned, grocery delivery is not a new idea and the true competitive advantage is around your distribution and order method as well as the margins you are able to achieve from hour suppliers. Amazon has the logistics covered and it seems as though Morrison has the corporate goods relationship taken care of. If I was Ocado, I’d be worried.