Ocado is an online supermarket, founded in London in 2000 by three former investment bankers who sought to fundamentally change the way people shopped for groceries.
Superficially, the Ocado value proposition is that of the wider ecommerce sector, offering range and convenience through reliable online ordering and delivery. However, what differentiates its business model – for example, from Amazon Fresh or ‘taxi for grocery’ players like Instacart – is its operational sophistication.
Rather than rely on third party stores and delivery infrastructure, as many competing services do, Ocado has developed a capital intensive operating system that allows it to out-compete incumbents and challengers alike in terms of reliability, range and convenience. At scale, the cost advantages of such an operating model drive a virtuous circle of operating leverage, investment and innovation in the business. Despite some challenges in its technological development, the company is expanding across the UK, has signed a fulfilment deal with a major UK retailer, and is likely to strike a deal to license its IP with a major retailer in Europe or the US in the near future.
To understand the operating model, the company’s first market, London, serves as a good example.
- Inbound trucks deposit food directly into the company’s main warehouse, situated 20 miles outside Central London.
- Once unloaded, food is sorted into categories, and loaded onto conveyors which whisk items to the relevant ‘aisles’ (e.g. meat is kept in a chilled area of the site; fresh groceries are stocked in another cooled area). All SKUs are tagged and sorted by product type.
- When an order is placed by a consumer, a one hour delivery slot is offered instantaneously based on predictive algorithms.
- At the same time, pickers select items from shelves and loaded them onto conveyors; items are then sent to be bagged.
- The algorithms developed by Ocado’s 300 developers ensure the vast network of conveyors can group orders which sourced from the warehouses various departments into a single batch by the time they reach the bagging area.
- Here, orders are deposited into plastic bags by an automated machine, and loaded into plastic crates. These are lifted into trucks, which drive to one of Ocado’s ‘spokes’, situated at strategic points around London. While throughput times vary according to shelf life, fresh goods can pass from an inbound to an outbound truck in 2 hours.
- Once at the ‘spokes’, trucks load into smaller vans, which complete deliveries on pre-automated routes optimised for time. The operational precision is such that crates are loaded in the same sequence as the order route: a driver simply has to pull out the next crate, knowing it will be the next one on the delivery route.
This short video details some of the technology behind the Ocado operation. In the words of one reporter, to watch the operation in action is like having a seat at ‘a kind of sci-fi ballet.’
How do the business and operating models support each other?
The business model – to deliver leading customer service, range and convenience – is supported wholly by the innovative operating model. Ocado has relatively small overheads compared to peers, will enjoy tremendous operating leverage as it scales, and has a production and distribution system that is rapid and flexible enough to deliver excellent service at a price point that will be able to become more competitive as time goes on.
The capital intensity and the focus on intellectual property and innovation are at the heart of the company’s success. The company has spent 15 years iterating on its model, developing solutions in-house, and sustaining losses in order to achieve a competitive advantage over other retailers in terms of delivering the key value proposition to consumers. This translates into 99.3% order accuracy, and 95.3% on-time delivery.
While the ride has been rough for investors, who endured a decade of operating losses, Ocado’s long term approach appears to be finally paying off.
- Ocado’s customer website: www.ocado.com
- Ocado’s corporate website: http://www.ocadogroup.com/investors/results-centre.aspx
- Financial Times coverage: http://www.ft.com/cms/s/2/64e18c6c-8144-11e5-8095-ed1a37d1e096.html#axzz3t08vJZxq
- Metro (UK newspaper) coverage: http://metro.co.uk/2013/07/08/xbox-controllers-and-19-miles-of-conveyor-belts-inside-ocados-warehouse-3867993/
- Telegraph (UK newspaper) coverage: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11376182/Ocado-to-open-fourth-distribution-centre.html
- Own research (site visit, 2013)