OCADO: Reimagining the future of online grocery

10 Nov, 2020

OCADO: Reimagining the future of online grocery

By Lisa Chai, Senior Research Analyst, ROBO Global

 

It took a global pandemic for the world to finally embrace online shopping. Since lockdowns began in early 2020, online shopping has increasingly become the preferred way for many people to shop. The result: McKinsey estimates that consumer adoption of ecommerce accelerated by as much as 10 years in the first 3 months of the COVID-19 crisis alone. In the grocery space, this period of unprecedented ecommerce expansion has fueled tremendous growth, and few have been as effective at taking advantage of the opportunity as UK-based Ocado, the world’s largest pure-play online grocer and provider of automation technology solutions for ecommerce.

According to David Shriver, Director of Communications at Ocado, online grocery gained 20 years of market share in just 20 weeks as its penetration rate into the UK online grocery market rose in response to the pandemic. Prior to the pandemic, the online channel’s market penetration was just 7%. As of October, that percentage had soared to capture 14% of market share. Demand has surged in recent months, leading to a sharp +52% rise in Ocado’s 3Q revenues, and the company expects this rapid growth to continue throughout the remainder of the year. Ocado’s retail business, which it runs as a JV with UK retail partner Marks & Spencer, is now expected to hit £60M in EBITDA this year, representing growth of 50% compared to its previous forecast of £40M.

 

A member of the ROBO Global Robotics, Automation & Artificial Intelligence Index, Ocado’s stock has soared 90% in the past 12 months.

 

Consumers are relying on ecommerce more than ever, a reality that is forcing businesses to adapt and shift toward digital transformation with urgency. A report by Accenture found that 61% of shoppers plan to reduce their in-store shopping due to concerns about potentially exposing essential workers to the virus. It seems inevitable that the latest lockdown implemented in the UK and Europe will further boost demand for online ordering and food delivery, and that this trend is likely to continue as we enter the holiday season. Though driven by the pandemic, it is a change that seems to be here to stay; in a recent global study by Salesforce, 58% of 12,000 consumers surveyed indicated that they expect to do more online shopping after the pandemic than they did before. 

Ocado has demonstrated flexibility and agility since the start of the pandemic, accelerating its innovation and working with its grocery partners to build more capacity in an effort to better meet the surge in demand for online shopping. In the coming months, the company is adding a variety of new SKUs for items such as apparel and home furnishings, a move that will support additional growth. More than 58,000 separate items are available on Ocado.com, including products under Ocado’s own label, and more than 325,000 orders are shipped weekly. Those numbers are both growing fast.

Also contributing to Ocado’s revenues is the success of its ecommerce platform, Ocado Retail. On its 3Q earnings call, retail partner Marks & Spencer highlighted that its investment in Ocado Retail has improved its margins and added strongly to its bottom line. Marks & Spencer expects this trend to persist as the company’s market share increases. The Ocado Retail solution, built to support online grocery marketplaces, boasts 99% order accuracy and 95% on-time delivery. In addition to enabling ecommerce capabilities for its partner retailers, Ocado Retail serves as a live testing environment and proving ground for Ocado’s technology, including the following key innovations:

 

    • Ocado’s Customer Fulfillment Centers, or ‘sheds,’ incorporate cutting-edge automation and artificial intelligence to service e-grocery orders using a network of robots that assist with the process of picking groceries. Advances in machine learning and robotic picking have helped double picking rates in 2020.
    • Ocado Zoom, the company’s same-day delivery service, has helped expand its customer base to those who prefer smaller orders to a ‘full basket shop.’ Offering over 10,000 products, the site requires a minimum spend of just £
    • Minimal food waste is at the core of the Ocado model. The company boasts “near zero food waste levels,” with a total food waste figure of 0.02%—just 1 in 6,000 items—compared to traditional supermarkets that typically waste between 2.5-3%.
    • Ocado’s Vertical Farming initiative was recently boosted thanks to a three-way JV with 80 Acre Farms, Priva Holding BV, and its investment stake in Jones Food Company, Europe’s largest vertical farm. Ocado’s vision is to harvest customers’ vegetables just hours before they are packed and miles from where they are shipped, providing the freshest produce possible. 

Over the past several years, Ocado has made strong progress in developing the machine learning, computer vision, and engineering systems required for robotic picking. To further strengthen these capabilities and maintain its competitive lead in this new digital landscape, Ocado recently acquired two robotics companies to solve one of the world’s hardest challenges in robotics: the picking and packing of groceries. Its acquisitions of Kindred Systems and Haddington Dynamics are likely to significantly accelerate its existing capabilities, enabling the company’s grocery partners to roll out new facilities more efficiently and with better economics. One of the first companies to use deep reinforcement learning to enable factory robots to handle more fragile and perishable items, Kindred’s AI-powered piece-picking solution is a game-changer in ecommerce order fulfillment. Combined with Haddington’s 3D-printed, highly dexterous and sensitive robotic arms, these solutions will enable faster sorting and bagging of online grocery orders, potentially saving up to £7M in annual costs at each Customer Fulfillment Center (CFC)[1].

In the US, the grocery market opportunity is estimated at $1 trillion[2]. That has made the competition fierce among traditional grocers as they strive to gain price and supply chain advantages over Amazon. In October, Target reported its best quarter ever thanks to a pandemic-ready digital transformation that enabled it to increase digital sales by 195% and support a 700% increase in BOPIS (buy online and pick-up in store) purchases. Another major player in the US, Walmart recently rolled out an unlimited grocery delivery service for $98 a year and is launching a new innovation hub to test prototypes for layouts for omnichannel assortment, fulfillment, and order pickup processes. It isn’t a market opportunity Ocado is willing to let slip by. In 2018, Ocado made its foray into the US market via an exclusive partnership with Kroger. Per the agreement, the two companies will jointly roll out over 20 automated CFCs over the next several years. According to Ocado Solutions CEO, Luke Jensen, “Grocery ecommerce has reached an inflection point in 2020, and with Kroger we are developing a game-changing ecosystem for serving online grocery across the US.”

Ocado may be the global market leader in the space, but this established innovator is already reimagining retail’s next chapter, with plans to further transform the digital and physical experience using AI and ground-breaking fulfillment processes. The pandemic has rapidly increased Ocado’s reach and market share, but that was just the beginning for this market innovator. The shift to online grocery shopping is expected to not only continue in our post-pandemic world, but to permanently change how we shop and receive our consumables. With a strong focus on innovation and strategic partnerships, Ocado is positioned well to make the most of this major shift.

 

ROBO Global currently offers three innovative index portfolios, including our Robotics & Automation Index (ROBO)Healthcare Technology & Innovation Index (HTEC), and Artificial Intelligence Index (THNQ). To learn more, visit our website at www.roboglobal.com.

 

 

[1] Source: Ocado. Represents 100% of total labor costs associated with picking, packing, and decanting processes at a regular CFC size

[2] Source: Ocado