FMI Midwinter Conference: Tim Steiner pitches Ocado model for the US
- In his keynote speech at the Food Marketing Institute's Midwinter Executive Conference, Tim Steiner, CEO of Ocado Group, gave attendees a tour of his $2.2 billion U.K. grocery delivery business, noting that the key to its profitability is in its technology and its focus on operational efficiency. Ocado employs 1,300 engineers, holds more than 200 patents, and spends less to deliver products to a customer than its closest competitor, Tesco, spends putting those same products on store shelves, Steiner said.
- Although store pickup has proven to be a popular option for U.S. consumers, Steiner said shoppers in the U.K. overwhelmingly favor home delivery. He said Ocado charges shoppers $2.10 for delivery, matches its competitors on price, and does more than half of its sales in fresh products.
- Asked whether Ocado's model could succeed in the much less population-dense U.S. market, Steiner said it would work in the nation's population centers. "We don't serve the whole of the U.K.," he said. "We don't go to the Scottish Highlands where there's thousands of acres between each residence. But there are swaths of the U.S. with the vast majority of your population in them where this will work."
At a conference filled with retail and manufacturing executives concerned over how to capitalize on the growing demand for online grocery shopping, Steiner offered a glimpse of the future.
Ocado, unlike just about every U.S. grocer, operates a profitable e-commerce business. And it does so by focusing on world-class technology and logistics, and by stripping costs out of the operation wherever possible. The company operates massive, automated warehouses where around 500 robots dance about picking products — coming within 5 millimeters of one another, Steiner said — and routing those items for delivery from 20 hubs situated around the U.K.
Ocado developed most of the software it uses, Steiner said, and focuses on routing its delivery vans in the most efficient ways possible. Each van delivers around 20 orders per shift, and does around $1.4 million in business annually — roughly the equivalent of a Dollar General store, he pointed out.
"We can get groceries from the back door of our shed to handing them to a customer in her kitchen for less cost than Tesco, who has 30 times our scale, can put them on the shelf of their hypermarket," Steiner said. "That's what delivering at the lowest possible cost means."
Ocado does most of its business in fresh — a category that many in the U.S believe is a struggle for online grocers. It does this by focusing on quality control and consistency, but also through innovative steps like listing the sell-by date of every product online.
Ocado also puts a great deal of emphasis on its customer service. This happens through the typical call center and digital channels, Steiner said, but also through some new methods that take advantage of Ocado's bleeding-edge technology. Recently, the company took every email it has received in its 15 years in business and fed it into a machine learning tool in order to learn more about what was most frustrating its customers.
As informative as Steiner's presentation was, it was primarily a sales pitch. The company, which operates as a pure-play online grocer as well as an e-commerce partner for brick-and-mortar grocers, has made moves abroad recently, and hopes to crack the U.S. market. In November, Ocado signed on with Group Casino in France, and earlier this month announced a deal with Sobeys in Canada — its first North American contract.
In the wake of Amazon's acquisition of Whole Foods, U.S. grocers scrambled to expand their online presence. Many inked deals with third-party providers like Instacart and Shipt. The former grew from serving just 30 markets to nearly 200 in less than a year’s time. This has given grocers a foothold in a fast-growing channel, but questions linger about the future of this store-focused fulfillment model that many have opted for. Simply put: As e-commerce grows, stores will likely struggle to serve both in-store and online demand.
Steiner made sure to highlight the inefficiencies of store fulfillment in his presentation. According to him, the process of getting a product into a grocery store, putting it on the shelf and then picking and packing it for online delivery takes 74 minutes, whereas Ocado can store and fulfill in just 15 total minutes.
That level of efficiency could very well lead Ocado to a partnership with a U.S. retailer. Although many shoppers have shown a preference for store pickup, home delivery has a lot of room to grow. As companies whittle down delivery fees and improve their consistency and logistics, it will likely become the preferred option for shoppers, particularly in dense markets.
Ocado's technology, its expertise and relentless focus on efficiency make it a potential foil for Amazon. As the e-tailer really begins to leverage its Whole Foods stores and distribution centers for online fulfillment this year, Ocado will probably start looking better and better. It's likely not a question of if the company will partner with a major U.S. retailer, but when.
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