Ocado’s half-year financial results, announced in July, showed an increase in sales and customer numbers alongside rising debt and a drop in profit, sparking speculation that it is too focused on tech development and not enough on grocery basics.
Although the retailer reported year-on-year double-digit sales growth for the six months to 28 May, John Ibbotson, director of Retail Vision consultancy, argues that Ocado’s revenue from selling groceries is not growing quickly enough to recoup “astronomical set-up costs”.
“It is far harder to make online grocery pay when you pit high-spec customer fulfilment centres and self-driving delivery vans against low-cost warehouses and low-paid humans,” he says.
“Arguably, Ocado’s greatest weakness has been to be too far ahead of the tech curve. It needs a retail giant to buy up its tech or take it over – and soon.”
The phrase “too far ahead of the tech curve” is not one you hear often in retail.
Ocado is making considerable investment in technology and its Ocado Technology unit employs about 1,000 developers and engineers to complement the wider organisation, but is it even possible to be too far ahead in technological thinking?
The firm’s tech arm’s main focus is on developing and selling the capabilities of the Ocado Smart Platform (OSP) to third-party retailers. Existing partners include Morrisons and an unnamed European player, and Ocado also uses the tech internally.
OSP utilises robotic picking software and machine learning from the moment a customer places an order, throughout the entire warehouse and supply chain process.
It is currently a continuous conveyer belt of innovation at Ocado. The company recently trialled the use of electric vehicles to fulfil small top-up shops for ambient goods, and driverless delivery vans that run on the smart platform.
James Donkin, a general manager at Ocado Technology, says: “We are always looking at the next disruptive thing that’s going to come along – and we then disrupt ourselves before someone else gets there first.
“In the warehouse, we have a fantastic site with huge capacity, using new technology that is a quantum leap forward. It’s true of lots of areas of our business that we’re looking at what’s coming next but, equally, we are looking to execute our strategy and get the capacity and the features in place for what we need right now.”
Donkin adds: “There are waves lapping up on the beach that you need to deal with, but you want to watch out for the next really big wave – the next significant technology innovation – and you want to be ready for it, and ride it, rather than let it wash over you.”
A report from Pointsource, a US-based consultancy and software company focused on digital transformation, suggests that retail has a much more established digital framework than many other industries, yet those operating in the sector are still learning how to prioritise tech that provides value to customers over tech that is simply “flashy” or “cool”.
Matt Soane, who works alongside Donkin as a general manager at Ocado Technologies, argues that the grocer does not just develop tomorrow’s technology for the sake of it.
“To many retailers, the technology we use, including our robotics and picking systems, will seem very advanced,” he says. “But it is actually being used for real, picking hundreds of thousands of orders every week. It is real technology that works and actually gives the business great efficiency.”
While Ocado prefers to perform its technology development in-house, others are more willing to look for inspiration elsewhere. For example, the John Lewis Partnership – comprising department store John Lewis and grocer Waitrose – works closely with startups through the long-running JLAB tech accelerator programme.
And in the online world, health and beauty retailer Feelunique has been quick to market with various tech innovations, including embedding augmented reality capability in its printed catalogues to encourage brand engagement.
Aaron Chatterley, founder and now non-executive director of the business, encourages retailers to keep investigating in new technology partnerships, but warns that a lot of money can be spent on things that quickly become outdated or overly fashionable.
“I don’t think it’s possible to be too far ahead of the tech curve as long as you are equally focused on the customer proposition – and I think Amazon is a good example of that,” says Chatterley.
“Amazon is as much at the cutting edge of the tech curve as Ocado is, but it still has that absolute overriding focus on what is best for the customer. It’s not possible to be too far ahead, as long as the focus is part of a balanced strategy.”
Lessons from history
In fact, there have been examples of retailers and retail-related concepts being too far ahead of the tech curve in the past.
In the early 2000s, Walmart made substantial plans to apply radio-frequency identification (RFID) tags to pallets and goods throughout its global distribution centres, but the project was abandoned after a breakdown in retailer-supplier relations and the high cost of the initiative.
The idea behind it was to improve tracking and management of products, and enable a single view of stock – three key goals for today’s retailers as they look to stave off the threat from Amazon et al.
Today, many major retailers are considering RFID, which is now more affordable and has wide-ranging benefits in a retail world where products are bought across multiple channels. If Walmart had persevered at the turn of the millennium, might it have ended up setting a benchmark for retail supply chain management and be better placed today?
Choosing where to invest tech budget and how much to spend is a real dilemma for retailers, it seems.
Sean Connolly, CEO of management consultancy Egremont Group, says: “First they need to think ‘future back’ and ‘customer back’. The former requires looking at how the world will actually be in 10 years’ time and reflecting on what needs to change to be ready for that. The latter involves understanding your core customer and how various customer segments think and connect with your business.”
Connolly advises combining customer-focused decisions throughout the organisation with “bold action” to fend off competition.
The Ocado team say they are ticking many of these boxes, but only the future will reveal whether the grocer’s tech-led approach will secure long-term success.
In five years’ time, if grocery items are regularly delivered by drone or people are relying on their connected homes to automate the shopping process, Ocado is well set to reap the benefits based on the sophisticated tech toolset it has today.
“That will be brilliant news for Ocado and there is every chance it will happen,” says Ibbotson, who admits that the grocer is ahead of the field in terms of tech capability, albeit in a less assured position with shareholders keen for profit growth and debt reduction.
“But in the cut-throat world of grocery, five years is a long time and Ocado needs to stay in the market,” he adds. ....................................................................................................................................