Britain’s Ocado misses its greatest delivery

This should have been Ocado Plc’s crisis. The online-only grocer should have been capitalising on shoppers avoiding crowded stores. Instead, last week it temporarily closed its website, potentially upsetting its customers.
Still, investors clearly believe that it will emerge as one of the winners from the rush to buy toilet paper and tinned soup. Ocado’s shares were up for the year last week.
But the pandemic has exposed some of the flaws in the group’s business model, which relies heavily on large, state-of-the-art robotic warehouses. Others, such as Walmart, take a more low-tech approach, fulfilling grocery orders from stores, where employees pluck packs of sausages and cereals from shelves for delivery to home or collection from supermarkets. When demand surges, it is much quicker and easier to ramp up the rate of grocery orders from stores compared to warehouses. As long as there are enough loaves of bread and toilet roll, more employees can simply put them into crates to be delivered to homes. In contrast, building and stocking automated warehouse is time-consuming and expensive. That makes Ocado’s business model less flexible.
The debate about which approach is best is about to cross the Atlantic. In 2018, Ocado struck a deal to run the online grocery operations of Kroger Co, the US’s second biggest grocer after Walmart. The two US food retail giants will be taking diametrically opposite routes to meeting online demand, which was expected to grow anyway even without the pandemic. We’ll have to see which ultimately wins out, although right now, the ability to quickly scale up and exploit stores looks to have a lot of advantages.
Ocado Retail, which is now a joint venture with British high street stalwart Marks & Spencer Group Plc, said that so far, sales growth in its second quarter was running at twice the rate of the 10% expansion in the first three months of the year. But sales could have been up 50-100% — if Ocado had enough room or robots to pack more orders.
Part of this is bad luck. Just over a year ago, the company suffered a catastrophic fire at its cutting edge facility in Andover, shutting down a space that would have been able to fulfill 60,000 orders a week. It has since clawed back some extra capacity at another facility that was being used by Wm Morrison Supermarkets Plc, its first online partner. But it hasn’t been able to make up all that was lost.
In contrast, Morrison, which sells through its own website and Amazon, is roughly doubling the number of stores that fulfill online orders to about 100. This isn’t all bad for Ocado, as Morrison’s own website will still use its technology to pick orders. But it does underline the greater flexibility of the old-fashioned approach.
Brick-and-mortar grocers have another advantage too: They can be used as pick-up points for customers. In the UK this is known as “click and collect”; elsewhere, it’s curbside or same-day pick-up. This is a strategy that Walmart has
embraced successfully, as it already offers pick-up from 3,200 stores
and will add another 500 locations this year.
—Bloomberg