Ocado’s business model challenged by resurgent established retailers focused on online growth

This article is by Bloomberg Intelligence Senior Analyst Charles Allen. The article first appeared in Logistics Business Magazine. 

The past year has seen supermarkets and logistics firms make huge changes to adapt to the challenges presented by the Covid-19 pandemic. One of these has been the expansion of supermarkets’ online delivery services that have been built to meet skyrocketing global demand.  Indeed, such has been the growth of traditional supermarkets that they are regaining the digital market advantage that online-only supermarket Ocado had built up over the last 20 years.

Ocado was early to home grocery delivery since the launch of its retail service, in partnership with Waitrose, in October 2002. Its recent capital raising, which saw it bring a further £1 billion through the issue of equity and another convertible bond to the table, took the gross total of new money to £2.7 billion, including from the partial disposal of its grocery business.

However, while this move may give it firepower to roll out automated delivery warehouses for its clients – a major step in the evolution of home grocery delivery – its competitors are also exploring solutions that make better use of the larger warehouse network to expedite deliveries. This has allowed for a much greater flexibility and more rapid expansion of capacity than Ocado’s ‘robots’ that are based in a small number of automated delivery warehouses have so far managed.

Ocado’s Customer Fulfilment Centre in Hatfield, Hertfordshire, is being surpassed by the automated facilities in Erith, Bristol and later in the year, Andover and Purfleet. These centres, its delivery hubs and 1,700-strong delivery fleet enable it to reach 74% of the U.K. households, compared to more than 90% at competing supermarkets.  But while the company has invested millions in pioneering this business model, it will be catching up during 2021 as its new capacity aims to match the delivery slots added by supermarkets over the last 12 months to meet increased demand.

The strength of the UK’s major physical supermarkets is their vast network, which allows for shorter local delivery routes. They can set up smaller automated facilities for online shopping within existing stores much faster than specialists such as Ocado investing in massive, automated warehouses staffed by robots.

Ocado’s ‘robots’ may cut staff costs and increase efficiency but each of the warehouses cost up to £30 million to construct, meaning that Ocado’s network will still depend on trunking and local delivery hubs.

One of the main attributes of Ocado’s model is that it can assemble a large grocery order in as little as six minutes. However, in almost all cases this doesn’t translate into one or two-hour delivery times, as the large warehouses have to support a wide distribution area, usually with satellite centres. The pandemic has increased demand for larger-basket shopping, though the longer-term trend to more convenience and instant delivery seems intact.

To counteract this issue, Ocado has devised Zoom, a smaller, robotic fulfilment centre with a more limited assortment of products that can deliver quickly to a small catchment area. This was largely in response to the threat of other competitors such as Amazon, Deliveroo and Uber Eats expanding their offering into the grocery market.

It is important to note that Covid-19 has reversed a ten-year trend towards convenience shopping and smaller average weekly spend at supermarkets as more and more people shop online. Ocado had an average basket of £137 in the 2020 fiscal year, and £147 in the most recent quarter, which signals it is well-positioned for big weekly shopping spends but less well-equipped if customers switch back to convenience spending once more severe lockdown restrictions are lifted across the UK.

It remains to be seen what the pandemic’s long-term impact on consumer habits will be, but it is likely to involve a much greater number of competitors vying for Ocado’s main business than ever before.