BRC Lecture: Bright future for Ocado as major grocers face increasing pressure on their models
Consumers are increasingly shopping online for food and this will put significant pressure on the major grocers whose cost models with large out-of-town stores puts them at a serious disadvantage to Ocado. By Glynn Davis
Speaking at the BRC Annual Retail Lecture in London this week Tim Steiner, chief executive of Ocado, painted a picture of a future where Ocado's pure online warehouse-based model would be the preeminent style of food retailer.
"If we can deliver lower prices [and greater range] than the bricks and mortar stores then we'll see significant channel shift with people shopping online. We are heavily skewed to a younger audience so we'll see a rise in customers as the population ages," he predicts.
At the moment Ocado has the bigger range - and is increasing it by 40% this year - but it is still marginally higher on cost, according to Steiner, because of its average delivery charge per order of £2.50.
But he expects this to decrease as greater volumes come through the business - a virtuous circle - which he suggests will be in stark contrast to the major grocers who will enter a vicious cycle of decline as their store densities fall from having fewer customers. This will lead to higher prices in order for them to support their store-based models.
Although the Ocado service only covers 70% of the UK population Steiner says it is moving towards 100% and in the case of London the business accounts for 10% of the region's total food sales and is growing at double-digit.
As well as concentrating on price and range Steiner highlighted Ocado's third focus - quality of service, which he says is based around accuracy and ease of use. Having only two locations - warehouses in Hatfield and Dordon – he says it is logistically easier than having stock at numerous stores. Steiner reveals Ocado has a stock turn of 52-times and only holds seven days worth of goods across the business.
He also points to innovation as a major aspect of the Ocado business and that personalisation is a major area for the future: "We're just at the beginning of this – only 5% down the personalisation journey. We've customised the aisles, and the next phase is to customise the shops for each customer.”
Making this sort of advance possible is the fact it develops its IT systems in-house, with Steiner suggesting others are "making fundamental mistakes" by buying best-of-breed products and then “knitting them together”. Instead, he says retailers need end-to-end solutions that are changed by a single vendor.
"Innovation is critical - it's the value of our business - and the cycles of innovation are moving faster and will continue to accelerate," he says, adding: "Matching Tesco's pricing went live in seven weeks. You can't do that using best-of-breed packages."
Such has been the efficiency of Ocado's systems that he says Sainsbury's has twice as many delivery vans for handling the same volume of orders as Ocado. It is this intellectual property that Morrison's recently bought into with this £200-plus deal to have Ocado handle its online grocery shopping.
He does not believe that this is a sign the company will be focusing more on distribution for other parties rather than on being a retailer with its own fascia. Steiner cites Amazon as running multiple streams of business - with its store, Kindle and cloud services for instance.
Future deals could involve non-food retailers in the UK and overseas grocers although he says the focus for the next six months is on the Morrison's deal, which will involve building up the team and continuing to invest in the platform.
He certainly does not envisage Ocado investing in any stores as part of a move to become multi-channel. "I'm told we are at a disadvantage but I don't see Amazon buying stores! We see them buying click & collect boxes instead. You don't need a store, just sign up to Collect+," he suggests.
He accuses retailers of believing their stores are the "optimum asset for click & collect" and that for food retailing it is particularly unsuited because the grocers give time slots for deliveries.
In contrast, for non-food, click & collect is more popular as courier companies are unable to indicate specific times of delivery. If it were possible to offer click & collect to shoppers at a discount to home-delivered goods then Steiner says it would have value to some customers.
In a final dig at the competition Steiner says Tesco, Asda and Sainsbury's do not make any money from their online operations and that such moves have been designed purely as competitive measures to avoid losing customers to the competition.
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