Offering a clue to the Ocado conundrum

Lawrence Hene says he loves a conundrum. That’s just as well, considering he has worked at Ocado since 2009. The pure-play online grocery retailer has spent its entire life facing questions over its business model, while new competitors and complex arrangements with its partners only add to the puzzle. 

The biggest newcomer is, of course, Amazon. And its eye-catching moves into grocery, culminating in the launch of the Ocado-style Amazon Fresh grocery delivery operation earlier this year, has only heightened debate about Ocado’s future.

Amazon-related questions (which historically have included whether the online giant would simply take a short-cut into online grocery delivery by buying Ocado) elicited an almost audible groan from chief executive Tim Steiner when he announced Ocado’s latest results earlier this month.

Despite good sales (up 15.4%) the most doom-mongering of media reports have suggested the launch of Amazon Fresh, to add to its portfolio of complementary grocery offers like Pantry, could even spell the death knell for Ocado. Is Hene sick of hearing its name?

There is a considered pause. “I guess I don’t get sick of it,” Hene says. “It’s a hugely competitive market but we don’t focus on any of our competitors. We focus on our shopper and, as long as we keep meeting that need, competitors can do what they like.”

It’s a sensible and common strategy. And Ocado has certainly earned a lot of loyalty from its shoppers so far - as slowing sales at rival (and partner) Waitrose attest. Indeed Amazon is playing catch-up with Ocado (albeit with possible latecomer advantage and pots of cash). Amazon’s same-day delivery service was hailed as revolutionary, but Hene is swift to point out that Ocado has “done same-day for many years”.

The same goes for Amazon’s freshness guarantee. Hene says “Ocado was the first”. And much was made of Amazon’s partnership with local producers, but Ocado has long-running relationships with small-scale companies, such as Gail’s Artisan Bakery, Laverstoke Park Farm, Daylesford, Attitude, Balance Me, Natoora, Odyssea and so forth, with the latest example its Caio Gusto Italian shop-within-a-shop, promoting a range of Italian brands, many of which have not been previously available in the UUK.

The only area in which Amazon does appear to have stolen a march on Ocado is via its ‘internet of things’ technology. Over the past two months, Amazon has launched the Dash wand - a wi-fi enabled device that customers can use to place an order, either by scanning a barcode of a particular product or by talking into a microphone - and the branded Dash buttons, which attach on (or nearby) the relevant ‘hardware’, such as a washing machine, and send an order to Amazon for a next-day delivery of ‘software’ (washing tablets in this example) with one press. So is Ocado going to launch anything similar soon?

“I’m going to give you a rubbish answer, I’m afraid,” he apologises. “We don’t tend to front run what we’re doing.” But while not wanting to give the game away, Hene can’t resist a dig, however, promising Ocado’s play will be “shopper-led” rather than a gimmick.

“Is it better than having a mobile phone?” he asks, in an obvious reference to Ocado’s Scan and Shop app, which has been using a barcode scanner to send items straight to your basket since 2014.

“I think internet of things devices, whether buttons or voice activated, that help consumption or make shoppers lives easier are very interesting. But the question is, how do you deliver that in a way that is helpful and natural for the shopper? Some of the devices out there today are really helpful. Others less so.”

Constant evolution

He would also rather take the time to get the technology right than rush to pip Amazon to the post. “There’s normally room for more than one player and being earliest isn’t necessarily who wins in the long term.”

Hene evidently enjoys the hurly burly of competition and the fact that the industry is constantly evolving. As if to prove the point, Sainsbury’s this week announced it will be extending its one-hour bike service across London, with a delivery charge of £4.99 for up to 20 items from a range of 5,000 SKUs (see p8).

It’s the latest example of an undeniable trend towards ever-faster delivery times and, arguably, puts Sainsbury’s ahead of the game, albeit in very limited areas of London (and Brookwood, in Surrey).

Hene admits there is a growing “on-demand culture” that super-speedy services such as this could cater for. But he can’t see these express delivery services becoming the norm any time soon.

“I think there’s a limit to it,” he says. “Grocery shops are usually planned and needing to eat doesn’t normally take you by surprise. And the premium delivery fees attached to these services can be a deterrent. The reason all the retailers offer cheap slots today - for example, we have free delivery Wednesday - is that customers have shown resistance to delivery charges. Our model works because we take so much cost out of the overall process we can afford to subsidise the delivery.”

Tesco

Price competitiveness is something Hene is passionate about. Ocado has matched Tesco on price for years now (it plasters the Tesco guarantee all over the back of its vans) and, despite the price war, he is quick to confirm that backtracking on the offer is out of the question. Whatever pressures price-matching Tesco presents.

“We created Tesco Price Match to follow whatever the market does. We intend to offer a mass-market price. That’s where we want to be and that’s our commitment to customers.” But Ocado has never been just about price. It’s always had a firm focus on service. As Hene puts it: “We aim to offer a Singapore Airlines service at EasyJet prices”.

Share prices

It’s another conundrum. As a concept, offering some of the keenest prices in the market combined with a premium service enabled by some of the most sophisticated bespoke technology in the market sounds like a safe bet. Yet it’s exactly this kind of thinking that has dampened enthusiasm for Ocado in the City.

In its most recent quarterly results, the online retailer boasted a 15% increase in gross sales, to hit £314m, plus a 19% increase in the average number of orders per week, from 190,000 last year to 226,000.

But questions about profitability persist. And the main takeaway from the results appeared to be Steiner’s admission that the market was facing “sustained and continuing margin pressure” that was unlikely to ease in the short term. The same words have been repeated many times by grocery CEOs in recent months, but while their shares have been slowly recovering, in the case of Ocado, it sent shares plummeting by nearly 15% overnight.

The severe reaction suggests analysts still have trouble believing the Ocado model can be profitable. Is that fair?

“It feels like that sometimes. In a way, it’s not that important. Obviously what’s happening with our share prices is important for our investors and outside perceptions, but the reality is we’re selling more groceries today than we did yesterday, and making shoppers happy. And in the long term, the shares will look after themselves.”

Hene also refutes suggestions that the Smart Platform is the only key to the business unlocking profitability. Ocado has failed to deliver on its promise to licence its software to other international retailers but “the international deal and UK grocery operation are two different strands of the business,” he says. “We’ve shown that, as a grocery business, it will be profitable. There is a really good profitable business to be built.”

Ocado has built up its business considerably since its launch. Its total SKU count has grown from 20,000 to 50,000, bolstered by the launch of new partnerships and own label. Hene remembers its own label was in its infancy when he joined; today, it accounts for over 10% of sales.

The CDC model has also allowed Ocado to “take our love of niche brands a long way”, singling out its Carrefour, free from and organic ranges. And Ocado seems to be enjoying success with its ‘shops within a shop’ such as Fetch, Sizzle, Daylesford and now Ciao Gusto. And while Hene is not responsible for the GM side, Fabled, its beauty products partnership with Marie Claire “seems to be going well” despite it being early days.

Weakness

Hene does admit to some frustrations. Ocado’s biggest weakness is the lack of awareness of its proposition - a weakness that, as the marketing and commercial director, he is determined to address. “Among our shoppers, awareness is very high but if you ask a random person in the street do they understand the Ocado proposition the answer may well be no,” he says.

“I don’t think they understand we stock so much and have half-hour slots starting at 5.30am in the morning. We have so many wonderful things for the shopper we haven’t made them understand.”

But the weakness is an opportunity because it’s in his grasp, he says. Once customers understand, Hene is confident they will be converts. “I think we’ve just got to convince them why it’s good for their life,” he says. “For people who haven’t tried online grocery, they don’t know how good the service can be.”

And even if he won’t tell us what lies in store technology wise, he’s excited by the continuing evolution.

“What’s exciting about it for me is that no one has successfully done online grocery before. No one’s cracked it. And the world and the technology is changing so quickly.”

Indeed, the industry has changed almost beyond recognition since Hene started at Ocado. As a newcomer, he remembers there was already “a lot of debate” over online grocery’s viability in the UK.

Today, Mintel estimates 48% of the UK population shop for groceries on the internet. And as Hene says, the debate is no longer over whether online grocery will work. Instead, it’s about “how big the opportunity is. And it’s massive. There’s no cap to this. If you do it right.”