Coles defends $150m Ocado centralised fulfilment centre deal
Coles chief executive Steven Cain has defended the retailer's $150 million partnership with UK online grocery retailer Ocado amid claims its centralised fulfilment model is inferior to the micro-fulfilment model adopted by Woolworths.
When Coles signed a long-term deal with Ocado in March Mr Cain said he expected the partnership, which includes a new website and two automated centralised fulfilment centres, would boost online sales by about $1 billion, double its home-delivery capacity, reduce cost-to-serve and lead to improved profit margins for Coles Online.
However, in a report last week, US investment bank Jefferies said the micro-fulfilment model – small fulfilment centres close to or inside supermarkets in urban areas – was the most profitable way to serve customers.
"We view micro-fulfilment centres (MFCs) as the most viable/economical answer to online fulfilment ... as it is relatively easy to deploy (low cost, quick to build), eliminates more than 75 per cent of manual costs ... largely leverages pre-existing fixed assets/supply chain, expedites the time required to serve, and carries a materially lower delivery cost versus its larger/pricier centralised fulfilment (CFC) counterpart," Jefferies analyst Christopher Mandeville said.
The investment bank downgraded US retailer Kroger, which has signed an agreement to build 20 CFCs using Ocado’s robot technology, saying: "Kroger's choice of the CFC method could be a multi-year mistake."
“We view Kroger’s centralised fulfilment centre platform as a considerably more expensive, time-consuming model that carries higher risk in what is still a nascent market,” Mr Mandeville said.
Jefferies favours the approach taken by Walmart, which started testing MFCs last year with Alert Innovation, and Woolworths, which signed an exclusive partnership with Takeoff Technologies in August to build three automated MFCs in 12 months.
"Micro-fulfilment helps retailers solve the labour and last-mile costs conundrum," Mr Mandeville said.
However, Mr Cain is standing by the Ocado deal, saying MFCs are relatively untested when large volumes are involved.
"The ones we've seen have a very limited range," Mr Cain told The Australian Financial Review. "Ocado will have the widest range and we think it's the most productive in terms of picks per hour.
"But we also recognise that there is a need for micro-fulfilment where the central fulfilment solution isn't volume-effective, because you need big volumes to run these CFCs.
"The other thing is that the Ocado deal is more of an opex deal as opposed to a capex deal. With Witron (which is building two automated distribution centres for Coles) we're paying for the equipment until we own it, but with Ocado we're paying more fees based on delivery, so it's a slightly different model than normal."
Supermarkets' stocks to rise
Despite Jefferies' reservations about CFCs, Jefferies Australia initiated coverage on Coles earlier this month with a buy recommendation and a share price target of $17, 26 per cent higher than the average price target of analysts surveyed by Bloomberg and well above the current market price of $15.27.
Jefferies analyst Michael Simotas, who joined the bank from Deutsche Bank last month, said Coles and Woolworths stood to gain as inflation returned to the market and independent and specialty retailers lost market share.
Mr Simotas also downplayed the threat from newcomer Kaufland, saying it was unlikely to have a material impact for some time because the hypermarket format was unlikely to resonate with Australian consumers.
"We expect Coles to continue to lose market share to Woolworths for two more years while still growing at a level sufficient to underpin modest operating leverage, resulting in supermarket [earnings] growth of about 4.5 per cent from the 2020 base," Mr Simotas said.
