As Ocado continues to transform from online delivery grocer to international tech giant, what can the retail industry learn from its success?
Since Ocado was founded in 2000, its branded food delivery vans have become a common sight on UK roads. Established as the country’s first online delivery grocer, the nearly two decades since its formation have seen the company spread far beyond its UK roots, evolving into a tech giant with supreme global scalability and a valuation of close to £10bn.
Its first big break was its ecommerce partnership with Waitrose, and it has since built out its business model to include the Ocado Smart Platform, which was adopted by Morrisons in 2013. The Smart Platform enables retailers to focus on their core offering, while leaving many of the technical and logistical challenges associated with e-commerce to Ocado.
Crucially, the ground-breaking proprietary technology developed by Ocado – ranging from front-end customer-facing web platforms to warehouse robotics – is scalable and replicable, offering fresh food retailers with a previously limited or non-existent online retail presence a highly-accelerated and efficient route to market.
The success of this approach means that Ocado has penned deals globally, including with Sobeys in Canada, ICA Gruppen in Sweden, Groupe Casino in France, and Coles in Australia. However, the most significant deal is the one signed with US retail giant Kroger in 2018.
Kroger, which boasts annual sales of £90bn, will be the first chain in the US to use Ocado’s technology, and will do so on an exclusive basis. The partnership has the potential to dwarf Ocado’s other agreements and disrupt the US grocery market in the process. It will also see Ocado build between three and 20 automated warehouses for Kroger, many of which will be in areas of the country where the retailer does not currently operate. In the US, where the grocery market is still largely regional, Ocado’s ability to help Kroger land in a new part of the country and build a business from scratch is incredibly attractive and highly disruptive.
Joint venture with M&S
Signaling the latest phase of Ocado’s partnership strategy, news broke earlier this year that M&S had paid £750m for half of its UK retail business. The deal means that, from 2020, Ocado will deliver M&S grocery products alongside its own-label products and branded goods.
The partnership is potentially game-changing for both parties. It enables M&S to rapidly bring a fully-formed online delivery option to market, and if executed correctly, it has the potential to be truly transformational for the fortunes of M&S food. For Ocado, it represents another significant step in its transition from online grocer to a global client services company.
But how has an online grocery delivery business – frequently met with skepticism in its early years – successfully evolved into an FTSE-100 technology company now in demand by some of the biggest grocery chains in the world?
AlixPartners spoke to Ocado CFO, Duncan Tatton-Brown, at this month’s FT Future of Retail Summit in London. A number of key themes emerged that the entire retail industry can take on board from this global success story:
Develop a forward-looking innovation culture
For Tatton-Brown, Ocado’s success has been built on its culture of restless innovation. In the early days, this approach was born out of necessity, as the young business attempted to do – and consistently improve upon – what no other had tried before. Today, this forward-looking culture and continually evolving strategy – influenced by founder Tim Steiner’s background as a bond trader where strategy was appraised daily – remains essential, as the business seeks to stay one step ahead of its rivals.
This heritage also means that much of the technology that makes Ocado such a success – from mechanical handling to supply and routing algorithms – was developed in-house from scratch, providing it with a differentiated platform-based business model coveted by the rest of the market.
A disruptive, innovative culture can bring benefits to retailers beyond the bottom-line prospects. For Ocado, it also means greater sustainability thanks to the algorithms that result in just 0.03% food wastage.
Success shouldn’t mean an end to innovation, and for Ocado, this means constantly examining and questioning its own approaches. A commitment to self-improvement not only improves Ocado’s approach to retail – it gives its customers and partners an idea to buy into.
As Tatton-Brown sees it, the prospect of cutting-edge thinking and continued innovation played an important factor in Kroger’s decision to partner with Ocado. It’s much more than just a platform and technology, it’s the proven capability to keep innovating – inherent in the Ocado brand ethos – that makes for a compelling business partner.
While many analysts will put Ocado’s startling valuation of around £10bn down to its technological solutions, Tatton-Brown maintains that a great platform will not deliver value if the customer doesn’t see a retail business that works for them. Technology can never be the ‘be all and end all’, especially if the end result isn’t a highly-satisfied end consumer.
Lessons for retailers
The benefits of an Ocado-style approach are clear in the numbers. While Ocado may still be yet to turn a profit, its market valuation is roughly double that of M&S – an established, profitable business with a group turnover of £10.4bn.
Traditional retailers can learn a great deal from Ocado. While the business models are different, the need for a culture of innovation and relentless self-assessment is critical if they are to survive and thrive in today’s challenging market. Those that are slow to react or don’t take brave decisions boldly will falter. An Ocado-style model – mastering both disruption and growth – is the future of retail.
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