Ocado & Online Grocery Economics

I lead grocery ecommerce fulfilment at The Partnering Group, a retail and CPG global consultancy helping, currently, mainly US grocers on their online fulfilment strategy and also to optimize the efficiency of their fulfilment. Prior to that, I had my own consultancy, focused mainly on European food retailers, helping them with online fulfilment strategy and execution. Prior to that, all the way back in 2013, I was a financial analyst for quite a long time – probably slightly too long – all around the world, with the previous 10 years focusing on Europe and the US.

There are two things. Firstly, there is the strategy of how they want to do the physical picking of the orders, which is the most time-consuming and costly part. That mainly involves optimizing the manual processes and it’s a mixture of processes, technology and people management, to try to get them towards best-in-, which is UK levels of picking efficiency, per hour. In other words, around 130 to 140 units per hour, fully loaded; that’s all inclusive of all the preparation and the staging, not just the physical picking. Just as a benchmark, in the US, the average is around 40 UPH, so there is a lot to be done there.

Also looking at if, how and when to bring in automation. Looking at micro fulfilment solutions, both from existing providers, like Dematic, KNAPP or now with Takeoff, or the more next-generation systems, like that from Alert Innovation, which is working with Walmart, and Fabric and AutoStore. Of course, Ocado is a key part of that, so benchmarking against Ocado which, currently, has the most experience in doing automated fulfilment for grocery, both for itself and for its partner Morrisons and other partners. Looking at whether it makes sense to choose Ocado, as a third party, or to build their own CFC in-house or to test a micro fulfilment solution provider; that’s all part of it.

I have also consulted for a couple of those previously mentioned, automated MFC providers.

The first question is, is it worth us even looking at automation yet? Probably only the bigger ones think it’s actually worth running the test. You’ve got to have the resources and the people to take that sort of risk because it hasn’t been done. Micro fulfilment, for grocery, has not yet been proven, in terms of the fact that we don’t have the full numbers as to exactly how efficient it can be. Clearly, if you are running at 40 units per hour, like in the US, you are going to get a significant uplift, straightaway. But it’s still in the testing and optimization phase.

Then it’s looking at which solution. Are we going to go with the tried and tested ones, where we know the multi-shuttle systems hardware works, but we don’t know how that works when you scale it down to levels that we haven’t been to before, such as $30 million sales capacity a year? Previously, they had a minimum of $100 - 300 million. Are they going to manage that themselves, by just buying that hardware from the system provider? Are they going to bring in a systems integrator? Are they going to use Takeoff, which has put the software layer into the integration? Or are they going to look at the centralized fulfilment model, from Ocado? There are pros and cons to each.

Because it is a very unknown area, some of the decisions are not necessarily based on pure logic. Humans are not pure logical creatures. Sometimes, whoever is in charge argues, or very strongly feels, that this solution is the one they should go for. Maybe it’s more strategic, so there is a strategic element. Do we want to be very aggressive, to gain share, or do we want to just test and see? There is a whole bunch of criteria depending on the retailer, what their general strategy is, what their risk tolerance is and what their resources are.