Ocado CEO Points to Micro-Fulfillment and Smaller CFCs

Ocado forecast that the shift to online grocery would continue long after coronavirus has abated, as it revealed it had more than 1m people on a waiting list for its UK grocery service.

“The world as we know it has changed,” said chief executive and co-founder Tim Steiner. “As a result of Covid‐19 we have seen years of growth in the online grocery market condensed into a matter of months and we won’t be going back.”

He expected a “permanent redrawing of the landscape of the grocery industry worldwide” that would mean more demand for its technology and expertise.

Sales at Ocado Retail, the UK online supermarket run as a joint venture with Marks and Spencer, rose 27 per cent to £1.02bn in the six months to May and were running 40 per cent higher year on year at the end of the period. Larger average order sizes and improvements in efficiency meant profit rose by 87 per cent to £45.7m.

Ocado recently raised £1bn in new equity and debt to help finance the rollout of its distribution centres — two of which opened in the first half — and is hiring hundreds of technical staff.

Companies that have licensed Ocado’s technology, including Kroger in the US, Aeon in Japan and Groupe Casino in France, “want to do more in ecommerce”, according to Mr Steiner.

“They want more new sheds, they want the CFCs (customer fulfilment centres) they have already committed to be scaling faster, and they’re also interested in different types of shed and store-pick capabilities,” he said.

Ocado’s growth rate was less than that reported by mainstream supermarkets such as Tesco and J Sainsbury, which reported jumps in online sales of 48 and 87 per cent in their respective first quarters.

Conventional supermarkets achieved a rapid increase in delivery and click-and-collect capacity by adding thousands of in-store pickers, staff who select customers’ orders.

Mr Steiner said Ocado could have grown sales at least fivefold during the pandemic if it had been able to expand capacity. Instead, overwhelming demand meant it had to close the website to new arrivals and focus on serving existing customers.

But he said the store-pick model used by supermarkets had structurally weaker profit margins compared with Ocado’s centralised warehouse model.

“I’d rather grow 40 per cent with a doubling of profitability than grow 100 per cent and wipe out my profits,” he said.

He added that Ocado had always found it easier to poach online customers from conventional supermarkets than acquire them elsewhere, suggesting the company would eventually benefit from the expansion of capacity at Tesco and Sainsbury in particular.

The improved profit of the retail division was almost exactly offset by an equivalent loss in Ocado’s solutions business. Accounting rules mean that revenue in that division can only be recognised when the distribution centres it builds for clients commence operation.

The group narrowed its overall pre-tax loss for the first half to £40.6m, from a loss of £147m last year, partly reflecting lower exceptional charges.

Ocado shares, which have been the standout performers in the food retail sector over the past few years, were little changed in early trade.

First reported @ https://www.ft.com/content/c2a16edc-973f-4e79-80e7-00e5de9b4973