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Anonymous

Former General Manager, Sam's Club

Costco Wholesale vs Sam's Club

Founder of Strategic Food Retail and Partner at The Partnering Group

Ocado & Online Grocery Economics

{audio:0:00:01} Can you provide some background to your experience and role at Ocado Solutions?

{audio:0:00:12} I was working for IBM in France and, actually, I was part of a team of global retail experts providing consulting and advice to the C-suites of retailers across the globe. I did lots of work for a major French grocery chain that does business in Western Europe, Eastern Europe and Asia. I was back from a trip to Taiwan and it was the middle of the summer and I got a call from a headhunter. They asked if I would consider relocating to London. I said, yes; what do you have to offer? They said would you want to work for Ocado? I said, let’s have the conversation because I remember some years ago when Ocado announced that they were expanding from being an online grocer to being a solutions provider, I thought that was super interesting. I want to work for these guys one day.

{audio:0:01:30} I got the call, got into a conversation and eventually got an offer after an interview with Tim Steiner in London. I was so impressed by the guy. The conversation I had with him was so interesting; the passion, the risk-taking, the creativity was just amazing so I decided to move to the UK and take the job.

{audio:0:02:06} What was so exciting about that conversation?

{audio:0:02:11} The vision, but it took me a while to understand after I had been in the job that Ocado was not about online grocery. This is not a retail company and I shouldn’t say this – because now that they are in a JV with Marks & Spencer, you may argue that they are a retailer – but to me, their strength was not in having a super-good buyers department, knowing retail, understanding customer acquisition, customer retention; this was not about being a retailer. I think their strength is actually in how they invented and created technology for online grocery fulfilment.

{audio:0:03:11} The people who started Ocado were three traders with Goldman Sachs. They didn’t have any retail experience which actually was super good and they didn’t have any physical stores. They started as a pure online player so they didn’t have the burden of physical stores and having a store estate portfolio that you need to leverage when you move on to online grocery.

{audio:0:03:47} Basically, what they did was, they launched a customer proposition of online grocery, home delivery, seven days a week from 05:30 to 23:30. It was a super-good customer proposition and then they realized that you needed to automate the fulfilment of the orders. The way people have shopped on Ocado, I would say, for the first 15 to 18 years, is that people would do their weekly shop on the Ocado website; so typically, people would order, on average, 48 items. They would typically order on a Thursday night for delivery on Friday night. So the frequency of an order was once a week, 48 items. The core customer is a family with young kids, too busy to go shopping. 48 items is a lot of items when it comes to fulfilment because, if you look at non-food ecommerce, the average number of items per basket is between two and three beating consumer electronics, cosmetics – which I know very well because I launched ecommerce for Sephora many years ago –  clothing, home furnishings; the number of items per order is two to three.

{audio:0:05:27} In online grocery, in the case of Ocado, it’s 48 items. That’s lots of labor and because it’s lots of labor, it’s lots of pounds. So from the very beginning, Ocado looked at how to put automation in the preparation of online grocery orders. I would say that, at some point when I was in the job, I realized that this was not a retailer; this was an engineering company. When I say engineering, I’m talking about software engineering. Lots of people do software development and they do software development, but they are a mechanical engineering company. Then you mix the software with the automation and you get that end-to-end solution that I was selling to grocers across the globe.

{audio:0:06:33} One thing you need to know is that, at some point, about five, six years ago Ocado actually looked at venturing out of the UK, so they looked at launching Ocado Netherlands. They looked at launching Ocado France. They looked at launching Ocado California and then they realized that being a grocer in many countries was super complicated. We know that the margins are what they are in grocery, but it’s super complicated because each country is slightly different in terms of shopping habits, shopping patterns, ways of cooking, ways of eating.

{audio:0:07:32} For example, if you look at the UK, the share of frozen food is rather tiny when it comes to your average weekly shop. Whereas in countries like Korea, frozen food is super important. There was no intention of launching into Korea, but I’m giving that example to show how different grocery shopping patterns can be.

{audio:0:08:01} Eventually, Ocado decided not to launch in the Netherlands, not to launch in France, not to launch in California. Instead, they realized that they had this asset, that they had developed this combination of software and warehouse automation and that it was a much better idea to become a technology company where the margins and valuations are much higher.

{audio:0:08:34} This is the story of how Ocado Solutions came to life, and then the guys who were running the Ocado grocery business were trying to sell these solutions as well. They were trying to sell these solutions to big grocery retailers across the globe. It was going kind of okay, but they didn’t have the retail culture to engage into conversations with the C-suite of retailers. So eventually, they hired Luke Jensen, who was running Sainsbury’s ecommerce, to come and run Ocado Solutions. Luke has been able to enter into this dialogue with grocery retailers because he had this background of running online for a traditional, legacy grocer. That was the first thing that really helped Ocado Solutions to do deals with grocery retailers.

{audio:0:09:55} Then the second big event that helped Ocado Solutions significantly, was what happened on June 16th of 2017. I remember, I was doing a presentation for a grocer in Kiev in Ukraine and I had to stop because I saw on my cellphone that Amazon was acquiring Whole Foods. There was a panic among legacy grocers that they needed to go online. The last six months have been another super moment for Ocado Solutions because of COVID. We know that, all over the world, grocery stores were still open but it became very scary to go shopping for groceries. Ocado Solutions is having another moment where everybody now understands – they understood on June 16th 2017 but they understand even better now – that they now seriously need to switch to online.

{audio:0:11:07} Can we walk through that process? Let’s say I’m Ocado selling the solution to you, as a grocer. What is the decision you have to make between choosing the Ocado Smart Platform versus alternatives?

{audio:0:11:26} I would say that the sales process of such a solution is very long. It’s very long, because it’s a radical transformation of the way grocers do things. Typically – I’m not going to disclose too much, I’m still under an NDA – the sales process is very much about building a business case with the potential client and looking at different fulfilment methods for online grocery. That includes dark stores, in-store picking, automated fulfilment centers. Eventually, when I was at Ocado, we saw the appearance and birth of micro fulfilment centers, which you can install in a physical store or at the back of a physical store. Grocers would, typically, compare these solutions and build a business case and present a business case to their board, bearing in mind that, in the case of Ocado Solutions and deploying the Ocado Solutions technology, the division of responsibility in the contract is super clear and the client actually builds the outer shell of the fulfilment center.

{audio:0:13:16} Ocado comes in and installs all their equipment and that’s not just the grid and the robots but that’s a combination of decant stations, big stations. The grid is just for storage and retrieval, so it’s the cube of moving shelves. The technology is all about goods to man technology, so nobody at Ocado that works in order fulfilment walks a single mile or a single meter. They may walk some meters but they don’t walk kilometers or miles during a day. Remember, some years ago, there were workers working for Amazon complaining about walking 17 kilometers per day; this does not happen because the Ocado technology is all about goods to man.

{audio:0:14:13} Ocado would come in and install their equipment under that shell that the retailer builds, bearing in mind that actually building these big fulfilment centers – I can come back to how big they are – is actually a significant investment for the retailers and grocers. The business case is complicated. The decision-making process is complicated, so long sales cycles but I’m hearing and seeing that the vendors of small fulfilment centers as well, they have long sales cycles.

{audio:0:15:06} I think some grocery retailers, because they are store-based retailers, automation is not something that is in their culture; or maybe it’s just in the culture of the guy who runs their warehouses and the guys who run the supply chain understand warehouse automation. But the guys who run ecommerce don’t necessarily understand that it’s going to cost them much less, potentially, per order fulfilled to use automation, rather than using physical labor picking in dark stores or picking in physical stores.

{audio:0:15:51} But how do they choose between those options of, let’s say, the micro fulfilment centers and the standard larger CFCs at Ocado?

{audio:0:16:02} We never had a case where micro fulfilment centers came into the equation. I had a call from a retailer in South America the other day and they were comparing Ocado Solutions and the micro fulfilment centers. The micro fulfilment centers are very much a starter kit. When you have a three-year-old, you’re going to buy them Lego Duplo because this is simpler. Eventually, they’ll be able to upgrade to Lego, which gives you much more flexibility in terms of what you can do. My team didn’t like it, but I love to say that the micro fulfilment centers are very much the starter kit, the Lego Duplo of automated fulfilment.

{audio:0:17:06} Because they can’t scale or because they just have less power and flexibility?

{audio:0:17:10} They leverage existing space so, basically, you’re going to cut your store in two because in all countries, food traffic to physical supermarkets is going down so you’re going to have an area dedicated to online fulfilment in your store and you’re going to put in automation. You don’t need to build a greenfield warehouse, a greenfield fulfilment center. You’ve got the four walls and the roof, so less capital expenditures, less risky, small scale. Before COVID, there were still some grocers who were very skeptical about the growth and the penetration of online grocery, so there is skepticism about how this is going to develop.

{audio:0:18:07} So this is your starter kit but then, eventually, in five years’ time, they will be running out of capacity with micro fulfilment centers and they will ask the micro fulfilment centers’ vendors if they can scale up? I would say that, in the current setup of micro fulfilment centers’ vendors, I don’t know how they can scale up. Whereas, of course, Ocado is working on smaller solutions and they can scale down because they’ve got this big cathedral in Erith that is enabled to manufacture – I love using industrial terms for this – they are able to manufacture 210,000 orders per day in Erith, when it’s at full capacity.

{audio:0:19:00} Scaling down is probably not too complicated, but scaling up, for the micro fulfilment centers’ vendors, getting to 210,000 orders per week, is going to be super challenging.

{audio:0:19:19} What do you see as the biggest risk in the adoption of Ocado’s offering, excluding the penetration of online? Let’s just assume that that’s going to happen, it’s going to grow to let’s say 10%, 20% in the next 10 years. If we’re at that stage, what would be the potential barrier to Ocado winning most of that market?

{audio:0:19:47} What I always say is that the beauty of software is that it’s very scalable. Building 20, 30 warehouses for Kroger in the US requires 20 to 30 more labor hours than building one single warehouse, so there’s a weakness in the non-scalability of building warehouses. I know the guys are working on improving the processes of installing the equipment but part of this warehouse automation, installation process and then integration with software, is not as scalable as deploying software to 1,000 clients instead of 100 clients. This is, I would say, a bottleneck.

{audio:0:20:50} They opened the first warehouse for Monoprix in France in April, and then the first for Sobeys in Canada in May, but I don’t know how they did this because the people could no longer travel and Ocado Solutions, when I was there, didn’t have offices in the clients’ countries yet. When I was working at IBM, they had local offices in all countries except North Korea, Iran and Sudan. But when you are a solutions provider, at some point, you cannot manage everything from Hatfield. The weakest link is probably the warehouse automation installation processes.

{audio:0:21:44} Doesn’t that lead to the attractiveness of those micro fulfilment centers, at least in the next five to 10 years? It’s less capex, arguably quicker to market and I don’t have to go and build on a greenfield space. I can just cut my space in half or bolt it on the side of my store. Do you think that’s changed the competitive landscape?

{audio:0:22:07} It did. Some of us felt we were being disrupted by the micro fulfilment centers’ vendors. The micro fulfilment centers’ vendors had been to see most of the big grocers across the globe, so there was super big awareness and endorsement by McKinsey. So McKinsey has been instrumental in making the micro fulfilment centers concept very well-known and understood by grocers.

{audio:0:22:48} This is the likes of Takeoff and Fabric, those types of companies?

{audio:0:22:50} Exactly. Yes, I was going to say CommonSense but now they’re called Fabric, so this is Fabric and Takeoff. You will never get the cost efficiencies of big fulfilment centers from micro fulfilment centers, when it comes to fulfilling the orders, but also when it comes to deliveries. The beauty of big fulfilment centers is that you never put a van on the road that goes half empty. I think it took some time for Ocado Solutions to realize that the UK is a very special case. The UK is a tiny country, with a huge population density in the South East and it’s got very good road infrastructure. What Ocado has been doing for some time – and this is likely to change – is that they would prepare orders in Hatfield or Erith, put orders on big lorries, drive up north to a cross-docking facility and then put orders on vans; hopefully on vans that were all full when they were going on the roads.

{audio:0:24:12} This works in the case where next day delivery is acceptable and, until two or three years ago, next day delivery was very acceptable. People would place their orders on Thursday because they knew they needed groceries on Friday night. Now, with people moving to same day delivery, that idea of trucking orders from Hatfield or Erith to the North of England no longer works. You’ve probably read that Ocado has announced that they’re going to be building a smaller fulfilment center – not a micro fulfilment center but a smaller fulfilment center – in Bristol that will serve where Ocado was not present or barely present, as well as the South West of England.

{audio:0:25:05} Do you think we could see grocers using multiple offerings, maybe one from Ocado, one from Takeoff?

{audio:0:25:12} Yes, and I can tell you there’s a temptation. Some grocers have requested exclusivity from Ocado Solutions which, in many cases, has been a mutual exclusivity, hence we try to refrain them from working with other solutions providers. I can’t say more, but you see what I mean.

{audio:0:25:52} The grocers obviously don’t want other competing grocers to use the same technology.

{audio:0:25:58} But then the whole point of Ocado is that they can sell the software to everyone.

{audio:0:26:04} No, because the exclusivity clause has been mutual.

{audio:0:26:09} That refutes the business model of Ocado, right, because the whole point of selling the software is that you can scale it?

{audio:0:26:16} I agree. I was talking about scalability.

{audio:0:26:22} Looking forward then, grocers are going to be use a mix, potentially, of multiple solutions, maybe one micro fulfilment center, maybe one big Ocado solution in the long run?

{audio:0:26:40} I’m coming back to the UK being a very special country. Talking about the retail business, 50% of Ocado orders come from within the M25. When I talk about concentration, when I’m talking about not just population density but customer density, I’m talking about this very special animal called London. In some other countries, you don’t have the same kind of population density in one tiny area. The big fulfilment centers will not work in countries where you have lots of medium sized cities, but not a huge city such as London or Paris. Paris has got ten million people so it makes sense to do a big fulfilment center in Paris, although you may say the penetration of online growth rates is not as high as in the UK and home delivery is not necessarily the solution that customers like the most because of all these drive-through things that were invented by Chronodrive in 1999. Home delivery is a better customer proposition, but people who have never tried it and are used to the drive may not realize that home delivery is a better customer proposition.

{audio:0:28:17} So geography does count. I remember discussing this with a retailer based in Colombia and they said they could have the demand if they aggregate the demand for online grocery in Bogotá and Medellín then they could put in a procurement center. The only thing is, there’s a big mountain between Bogotá and Medellín so yes, you will have the volumes so you can build the capacity, but then you’re going to struggle to deliver.

{audio:0:28:45} The micro centers are actually really important then?

{audio:0:28:48} Yes. I think it took time for Ocado Solutions to realize that the big fulfilment centers don’t work in all geographies. I’ve worked with cases with very challenging geographies because there was demand scattered here and there, but not enough to warrant your big fulfilment capacities.

{audio:0:29:11} And the US is mainly micro fulfilment centers for Kroger, doing stuff like that or is it different?

{audio:0:29:15} No. It’s medium-sized fulfilment centers that Ocado Solutions is building for Kroger in the US. It’s not as big as the UK fulfilment centers, but it’s very far away from being a micro fulfilment center.

{audio:0:29:32} Can the competitors, like Takeoff or Fabric, provide these medium sized centers as well?

{audio:0:29:39} No, they don’t, not at all.

{audio:0:29:42} They do a specific type of in-store fulfilment centers, not the standalone centers?

{audio:0:29:53} Ocado likes to call smaller fulfilment centers mini fulfilment centers compared to the big ones. But even the Kroger ones were not called mini; they were just regular fulfilment centers.

{audio:0:30:22} This US is pretty dispersed in population. Obviously, they have dense areas but it’s a big land mass and I guess you have demand in wide and disbursed places. How do you see that fulfilment center, either micro or standard, driving demand in the US?

{audio:0:30:47} Let’s call what Ocado Solutions are building for Kroger in the US, mid-sized fulfilment centers. If you look at the locations that Kroger has announced so far, we’re talking about very big cities. We’re talking about big cities in the US, so they haven’t gone to the smaller cities yet. They’re covering the big metropolitan areas. I remember when I was the Chief Commercial Officer of Ocado Solutions, I had two criteria before I would get in touch with a retailer. I would look at cost of labor, because it doesn’t make sense to deploy automation in countries where cost of labor is low. When I was getting requests from India, I would host people coming from India to look at our fulfilment centers in the UK but, at the end of the day, we would come to the conclusion that there was no reason for me to sell this to them because in some areas in India, you get eight hours of picking labor for US$1.

{audio:0:32:09} What’s the point of putting automation in this country. I would look at cost of labor and then I would target big cities. I was super interested in places like Istanbul or Moscow. I would look at very big cities and although you may say Manila is probably not the right city, but taking into consideration city size as well as cost of labor, we could target specific areas.

{audio:0:32:41} Let’s say that I’m a grocer and I wish to deploy OSP and build a fulfilment center. What is the process of deployment?

{audio:0:32:53} You do your business case, you convince your board, you sign a contract with Ocado.

{audio:0:33:06} What does the contract say? I pay for the greenfield site and the building up front; you guys bring the equipment and the robots?

{audio:0:33:13} Yes, it’s 90 pages of division of responsibility so it’s a little bit more complicated than this. One thing on the billing model is that it’s all as a service so it’s software as a service as well as automation as a service. Therefore, Ocado would bring in all their pieces of hardware and by hardware, I mean warehouse automation and everything that goes with it. Ocado would buy the equipment or manufacture the equipment and that would be installed into a building that is built by the client. The very first exercise that a client would do after they sign a contract with Ocado Solutions is look for land. You look for land that has good road circulation, that is close to your target area, so it’s not a trivial exercise; it’s actually very complicated.

{audio:0:34:22} You may decide that when you choose a piece of land that you’re not going to be able to serve some areas, so this is the exercise called network planning. In some cases, I remember we were doing a case in a small country, but that small country had some challenges in terms of bridges, islands etc. But at some point, they realized that with one central fulfilment center in the main city, there were still some areas of the country that they would not be able to serve because of natural physical constraints.

{audio:0:35:14} How does this fit with the supply chain? Let’s say I’m a grocer, I’ve got my brand suppliers or vendors shipping their product to a certain fulfilment center. How do I get the new fulfilment center to plug into that supply chain?

{audio:0:35:34} What Ocado has done – and remember they’re a pure player – they don’t have warehouses; they only have fulfilment centers. So vendors deliver directly to the fulfilment center. I was driving past Carphone Warehouse the other day, looking at the size of the facility. They have these huge warehouses and they get deliveries from vendors to these big warehouses and then they decant the palettes, prepare mixed palettes, deliver to stores and then the stores put the products on shelves. In other words, they open the palettes and boxes.

{audio:0:36:32} They have a hub and spoke. They have a big warehouse in the middle and they deliver to maybe mini fulfilment centers, sometimes in areas, then to the stores.

{audio:0:36:41} Yes. I would say ideally – ideal does not always exist – but the ideal situation is actually having deliveries from suppliers directly to the fulfilment center. The way the fulfilment center is designed, there’s an area for receiving palettes and then decanting the products into what is called storage tote which I love to call a moving shelf.

{audio:0:37:19} So the suppliers will ship their product straight to the new Ocado fulfilment center and that gets shipped out then in the vans?

{audio:0:37:32} Or you could decide that, actually, you get everything in your big central warehouse because you pay less to your supplier to get your deliveries into one single place and then you serve your fulfilment center from your central warehouse, just as if you were serving a store.

{audio:0:37:53} Is there anything unique about the logistics and the last mile part of the offering that Ocado produce?

{audio:0:37:58} Yes. The very first thing is the way you place an order on the Ocado website. You’re very much pushed to actually select a delivery slot and a delivery address. You first select that, then you start your shopping. Ocado will show you only the products that they know will be available when they pick your order for your designated delivery slot and delivery address, so they will not show you products that will be out of stock when they know they will be picking your order.

{audio:0:39:05} Your order will also be assigned to a delivery route and your order may change delivery routes many times, because there could be many vans serving your area for your selected timeslot, so there’s a constant recalculation on which van your order is likely to go. The intention of Ocado is that a van should never go empty, half empty, three quarters empty onto the road, so the algorithm actually makes sure that the vans go full on the road. Then, on average, a delivery shift is eight hours and, on average, within that time, a driver delivers to 20 addresses. A van is 80 delivery totes and an average order is four delivery totes, 20 orders for an eight-hour shift.

{audio:0:40:26} There are many combinations of these 20 addresses that you can have and the software has been developed to actually optimize and minimize the time required to go to these 20 addresses. Ocado is using lots of external data as well as historical data. When I say standard data, it’s the weather, it’s construction works, it’s lots of external data that they need to actually design that delivery route. This is also quite unique, filling up the vans and then minimizing the time to deliver these 20 orders.

{audio:0:41:18} How does the micro fulfilment center compare to this? How do they approach that last mile?

{audio:0:41:26} I don’t know that part, but because they’re going to get less volume, we’re talking about small capacity and less volume. So there is less chance, less probability that, for any given timeslot and every delivery timeslot, the vans will be able to go full on the road. That’s the beauty of the big fulfilment centers; the ability to fill up the vans and hence reduce the cost of delivery per order. The micro fulfilment centers will never be able to compete on this.

{audio:0:42:03} But Ocado will still use that software for their Zoom, for their smaller micro fulfilment centers?

{audio:0:42:11} On Zoom, they deliver orders one by one, so the delivery promise is you can have a delivery in one hour or two hours. I remember being at the Ocado Zoom fulfilment center in Acton and looking at the orders and the orders go out one by one by bike or car, within a radius of four kilometers around the mini fulfilment center or the immediacy fulfilment center; this is a completely different story. You’ll never be able to consolidate X orders to go on the van if your delivery promise is one hour. Actually, there was an article in The Grocer in the spring of 2019, a few weeks after we had launched Ocado Zoom and what they had measured was that, on average, we were delivering in 34 minutes. In 34 minutes, you need to have guys on bikes or waiting for the orders to come.

{audio:0:43:27} It’s a completely different offering then?

{audio:0:43:31} In terms of the pricing then, the grocer pays up front to cover the buildout of the greenfield sites, Ocado brings the equipment in; I believe it’s a 1% software fee of the capacity plus a variable fee based on utilization as well? How does the price typically work?

{audio:0:43:55} I cannot discuss anything on this, but I will explain the basics. The grocer builds the shell and Ocado Solutions comes in and installs the equipment. Then, from the moment the contract is signed, there’s also the exercise of software integration. As in all software service models, you have a setup fee and then you’ve got recurring monthly fees. The same thing for the equipment; you’ve got a setup fee that covers the design of the building by Ocado. When the client builds their shell, it’s something that has been designed by Ocado, so there’s a setup fee, plus a monthly fee for the utilization of the equipment.

{audio:0:45:05} One thing that is super important to know is that in the fees for using the equipment, there is a team of robotics engineers who work 24/7 in the client fulfilment centers. The fees cover many things but also the 24/7 presence of robotics engineers in the client’s fulfilment center.

{audio:0:45:38} Do you see the micro fulfilment centers pricing disruptively or differently than Ocado?

{audio:0:45:46} I’ve got no idea at all. Frankly, I don’t know anything about this. I heard rumors that their software integration was super painful. I should say that software integration, in general, is painful so no surprise there. But frankly, I don’t know anything about their billing model.

{audio:0:46:07} If I’m a grocer and I’m paying a fee, granted obviously, it’s crucial to tap into the online market, but I believe Tesco runs a very tight ship and it took them years to become profitable. Even if I’m paying Ocado 1%, 2%, 3% plus the complexities in online, is it really profitable for the grocers to roll this out?

{audio:0:46:40} The first thing is, I think there’s a supply and demand thing. There are lots of consumers, in many markets, who no longer want to shop in physical stores and want to shop online, so some retailers simply have no choice. Are there going to make better money online or in physical stores? The debate is still very much open and although I’d love to say, when I was at Ocado, that online could be more profitable, especially if you invested in automation, I was challenged yesterday by some Australians on the topic and, actually, I would say online grocery is as challenging as store based grocery.

{audio:0:47:30} There was a study by one of the investment banks, a few years ago, that shows that promotional intensity in online grocery was actually much lower than promotional intensity in physical stores. But since most of the promotions are actually supplier funded, I don’t think this has a major impact on online profitability.

{audio:0:48:01} We loved to say, when I was at Ocado Solutions, that you can sell lots of things to suppliers, like premium placement on the homepage, premium placement here, access to data where physical retailers do this already. They charge you for everything, such as end caps, so the website allows the grocers who use OSP to actually charge their vendors for special online services, but this is more profitable than selling end caps in physical stores or selling space in the weekly flyers.

{audio:0:48:49} Do you think we’ll see pressure on pricing, the price that the online vendors charge the grocers for the software integration and the SaaS offering? Do you think we’ll see pressure on that over the next five to seven years?

{audio:0:49:07} There’s no such thing as a price list in solutions provision.

{audio:0:49:15} It just really depends on the client and the arrangement?

{audio:0:49:21} I was alluding to the fact that the sales process is super long. I had been selling software prior to joining Ocado Solutions. There’s no such thing as a list price.

{audio:0:49:39} That’s where it’s interesting, because is Ocado more of a systems integrator than a truly SaaS business or how do you look at that?

{audio:0:49:50} Now they’re very much SaaS, software as a service as well as a RaaS, robotics as a service. They’re very much an ‘as a service’ provider. I don’t think they’re very good in systems integration. They are good at integrating their software into their automation, such as getting all these orders, orchestrating the fulfilment of the orders and then that orchestration; making the robots move and pull out the right storage shelf, so they have integrated their software and hardware. They are automated fulfilment centers.

{audio:0:50:52} Integration into the IT architecture of grocers is possibly more of a challenge at this stage. I know they’re going to improve on this, but this was probably more of a challenge.

{audio:0:51:08} What do you see as the biggest risk for the online vendors in penetrating that online market? Ocado, Takeoff, Fabric, all these businesses that are trying to serve the grocers. What do you think is the biggest risk or driver of the success of these businesses?

{audio:0:51:37} The first thing is these are complex solutions. They are complex to run which is why Ocado puts teams of robotics engineers in their clients’ fulfilment centers, so these are hard to integrate technologies.

{audio:0:52:06} Is there a risk they could be obsolete though? Ocado built this technology 20 years in London or the UK, assuming a certain infrastructure. Is there a risk there could be another evolution of technology?

{audio:0:52:20} The thing is, when we talk about Ocado Solutions, they have been building automation for 20 years but they used automation from third party vendors and the grid and robot solution is actually six years old, so it’s not that old. They’re working super hard and remember what I said, they’re a mechanical engineering company. They’re working very hard on reducing the costs, improving the productivity of all pieces of equipment. They’re on a continuous improvement type approach, so are not too worried on this. I know they’re working on improving the solution; just as a software vendor has a roadmap, so there’s a software roadmap and there’s a roadmap for the automation as well as you would expect.

{audio:0:53:22} If you think about the grid and the robots, the grid and the robots actually replace shelving and people walking to the shelves, to put away and retrieve products. The grid is super compact; I remember visiting warehouses of grocery retailers which were kilometers long. That solution uses much less space, it’s super compact and then uses no human labor, so there’s no human labor involved in putting away and retrieving the products. This is super advanced. I don’t see this improving over the next 50 years because this is so good; I don’t know what kind of improvement you can make. There will be improvements but, for the time being, it’s really good enough.

{audio:0:54:40} So where there could be improvement is around the fact that picking is still manual; many people don’t realize this. There are picking stations where a human picker will be presented with a storage tote that is retrieved from the grid and brought to the picker. The picker picks an item inside the storage tote and puts it in the delivery tote; this is still manual. But Ocado’s been working on automating this. The problem is, you can have lots of robotic arms like you have in the car industry but the robotic arms in the car industry, they always do the same task: painting, assembling, whatever.

{audio:0:55:37} In online grocery fulfilment, each product is different so you lift a pack of six bottles of mineral water but when it comes to picking a mango, you want to make sure you don’t crush the mango. Ocado needs to find a solution whereby a robot can multitask. My favorite thing for testing this were packs of crisps because actually a pack of crisps is super hard for a robotic arm to pick. For this, Ocado used robotic arms with suction cups, but the suction cups do not work on packs of six bottles of mineral water. You need to rethink your whole fulfilment process, so that you’ve got different robotic arms picking mangos, packs of crisps and very heavy dog food.

{audio:0:56:38} So Ocado’s solution really is the most advanced, but also the cheapest option if any grocer wants to become seriously online, in terms of that standard fulfilment center or a larger one?

{audio:0:56:53} Seriously is the word, but for the time being and for the next five years, the micro fulfilment centers – because they are low risk and low capex – will have a moment until somebody runs out of capacity and asks them to build something bigger. There traditional warehouse automation vendors, such as KNAPP in Austria; Takeoff uses KNAPP technology. KNAPP should actually buy these guys. KNAPP doesn’t know retail, online retail, online grocery, online grocery software, home delivery, but KNAPP and all the other warehouse automation guys in Switzerland, the Netherlands, Germany and Austria, they should be looking at these start-ups that have developed a solution that is a combination of software and automation just for online grocery. But because the Takeoffs and Fabrics will never be able to scale up, if I were KNAPP, I would be looking at acquiring them.

Former Chief Commercial Officer at Ocado Solutions, Ocado

Ocado Solutions Platform: Powering Global Online Grocery

Breakdown of a typical order; number of items, target customer, delivery times.

Core differences in the grocery market and geographic structure of the UK versus other countries

Alternatives to OSP and the risk of Micro Fulfilment centres

How customers deploy OSP and the role of Ocado in the systems integration

How OSP and the new fulfilment centre fits into the grocery supply chain

The competitive advantages for Ocado Solutions Platform

Core risks to Ocado Solutions over the next 10 years and how Ocado needs to adapt