Ocado has announced a profitable year for its grocery business but it also has ambitions to grow its General Merchandise operations, both as a retailer and as a technology company. Emma Herrod learnt more from the company’s Managing Director, General Merchandise, James Matthews.
While Ocado has been growing its online grocery business at 15% over the past year (with a 65% year-on-year increase in profit before tax), its general merchandise operation has become the fastest growing part of Ocado.com. It currently represents 7 – 8% of the total business, explains James Matthews, Managing Director, General Merchandise, Ocado, and is expected to grow to 15% of the total business over the next 5-year period. General merchandise will expand through Ocado’s own retail offering as well as through its business as a technology provider.
The company launched its general merchandise business four years ago as it expanded the range of products available on the Ocado.com grocery website. Categories here include home and garden, beauty, health & medicines and toys. To date, 17,000 non-food products have been made available to grocery shoppers, including brands such as Lego, Dulux and Toni&Guy.
The second element of its growth strategy, Matthews says, is the launch of new ‘destination’ sites. These are specialist sites selling items not usually found in a supermarket setting but which can be sold on the same technology and fulfilment offering as Ocado.com, enabling customers to enjoy the benefits of online grocery shopping such as same- or next-day delivery. The pet food site Fetch was launched eighteen months ago and has “already made a significant difference to the market” giving “enhanced convenience over the market standard”. It has brought new suppliers and brands online and made them available as part of customers’ Ocado shop. “I have an objective to be the biggest online pet business in the UK by the end of 2016,” says Matthews.
“The challenge has been keeping on top of growth,” as Fetch has been growing “beyond expectations, with tens of millions of pounds of retail sales.” Sizzle, which concentrates on the kitchen and dining category with brands such as Le Creuset, Daylesford and Denby, was launched a year ago.
While entities in their own right, Fetch and Sizzle offer customers all the convenience of Ocado and the same fulfilment and delivery network. They can purchase from these sites and have the products delivered along with their Ocado grocery order.
More than two million grocery items are picked and packed every day from Ocado’s two main Customer Fulfilment Centres (CFCs) in Hatfield and Dordon. A number of hubs then consolidate and deliver complete orders to customers. A further CFC is being tested in Andover with another planned for Erith in South East London. The Andover CFC will be the first to use Ocado’s own mobile-operated automated fulfilment system. Between them, the Andover and Erith CFCs can handle £1.3bn of additional capacity. “We’re investing in a business that’s aiming to do billions of pounds of sales and we’re adding £150m of sales each year,” says Matthews.
“Every non-food product is here though,” he adds, referring to the firm’s 80,000 square feet general merchandise distribution centre in Welwyn Garden City in which we’re sitting. The semi-automated warehouse, which is run by a proprietary system utilising a Norwegian robotic system, currently serves Ocado, Fetch, Sizzle and Morrisons.
From this centre, customer orders can be injected into the grocery delivery network at a number of points. If the customer is local to the Hatfield CFC, explains Matthews, the non-food part of their order will be sent to Hatfield and incorporated with their grocery order there. If, however, the customer is in Manchester, the non-food goods will picked and packed here and then amalgamated with the grocery order at the Manchester hub and the two parts will be delivered to the customer at the same time. “We can get the order picked and packed in 25 minutes,” he says, but from here you need to add on the lead time of driving it to Manchester. This isn’t an issue, though, since “the vast majority of orders are for delivery next day”.
The Welwyn Garden City warehouse has a capacity of 50,000-plus products and is able to fulfil around £200m of sales. The pick rate currently runs into six figures every day. It is kitted out with a system of 100,000 free-standing storage boxes over which 100 wirelessly-controlled robots run. The physical engineering and control is a provided by a third party but the rest of the automation – screens for packing, van loading, planning and ancillary processes – have been developed by Ocado. Its new Smart Platform grocery warehouse infrastructure, currently being tested at the warehouse in Andover, uses hardware brought in from other industries such as baggage handling and pharmaceuticals and has been repurposed by Ocado for the needs of its own business and third parties. The Andover warehouse is controlled by the most densely packed mobile network in the world, controlling and co-ordinating the movements of hundreds of thousands of crates containing millions of grocery items, in real time and in parallel. The system is based on 4G telecoms technology deployed in the unlicensed 5GHz Wi-Fi band enabling Ocado to co-ordinate thousands of fast-moving machines to within a fraction of a second.
In all, 1,000 machines can be communicated with 10 times a second from a single base station (over 10 times more than is usually possible), all within an area the size of an Olympic swimming pool. Because the solution is scalable, it could potentially handle 20 times the number of movements. The company has no plans currently to automate general merchandise with this new network.
It would be hard to fully automate the fulfilment process, thinks Matthews, mainly because of the many different shapes of products. While it’s relatively easy to pick wine bottles, for example, picking spring onions and a toaster raise different challenges – especially if they are in a single order.
Matthews believes that Ocado wouldn’t be in business were it not for the level of automation in the grocery business. He points out that while it isn’t so important to the back end of the general merchandise business, you don’t have to spend too much time picking a £2 item for a grocery order to make it unprofitable. It allows Ocado to pack a lot of skus into a small space and fulfil lots of sales efficiently with lower overheads. “For general merchandise it’s less critical and massively helpful,” he says, adding “it’s a smart way to go”.
Fetch and Sizzle also have their own customers who do not order from Ocado. “It’s about 50/50,” says Matthews, so not everything leaving the warehouse is branded in the same way. There are also orders destined for Morrisons customers.
Launching later in 2016 is Ocado’s Marie Claire joint venture with publisher Time Inc. The Marie Claire Beauty business will combine an online premium beauty offering with a flagship store in West London. Orders and store replenishment will be handled from the Welwyn Garden City warehouse and some products will be delivered to the store direct from suppliers.
Ocado is as much a technology company as it is a retailer; anything it develops it does so for its own retail business and to meet the needs of its retail strategy, while also giving it the intellectual property which other retailers can use. The resulting commercialisation of its intellectual property in terms of ecommerce, mobile, fulfilment and last mile is the Ocado Smart Platform and this forms the third part of its general merchandise expansion.
“Ocado Group’s primary focus right now in terms of being a platform technology provider is international grocery,” says Matthews – and the deals that Ocado will be doing this year are with large international grocery businesses. However, Matthews explains that while contracts mean that it’s not permitted to work with other UK supermarkets, the company is “unrestricted from doing UK general merchandise businesses, so secondary to starting out an international supermarket business is to offer the platform to other retailers if they wish to use it as a service”.
Morrisons was the first third party to launch on the Smart Platform and Ocado is currently learning from the Morrisons roll out of the cloud-based solution so it can improve it and provide faster, easier implementation. This would enable multiple retailers to launch on it at the same time – something to which its full-year results statement alludes to when it says: “We expect to sign multiple deals in multiple territories in the medium term.”
The firm is currently replatforming its entire technology stack, in a bid to get the software into a state that will allow it to roll out to multiple retailers simultaneously without bottlenecks.
Matthews explains that the Ocado sites have been replatforming for the past fifteen years through a process of small incremental enhancements as things are developed for its own business. He says this move to the cloud is “a more wholesale change to the way we work and the systems we have. The catalyst was the desire to scale internationally.
“There are modules to the platform but it is a full end-to-end turnkey solution,” he adds, with ecommerce and mobile offering all of the features available to Ocado customers, its automated fulfilment solution and the necessary software for last mile operations. Once the Marie Claire Beauty business has gone live, the technology will also have proved itself in an omnichannel setting. But Matthews is quick to point out that “it will be 2017 at the earliest” before a third party UK retailer is seen on the Ocado platform. The company may launch more general merchandise categories or destination sites, either on its own or in partnership with other brands before then.
He explains that it has been interesting launching the general merchandise aspects of the business with the different challenges it throws up. Higher value products, returns, clearance and discounting and the customer contact centre are just a few of the issues which have had to be worked out. Plus the lead times on which things are purchased are much longer for general merchandise; whereas groceries need to be as fresh as possible, the opposite is true of toys for Christmas which have already been planned for 2016’s peak sales period. Matthews explains how the business has had to change processes in order to handle the different kind of trading needed for the general merchandise categories while also recruiting people with the necessary skills. Ultimately, the aim of the business is to sell goods to customers, take payment and deliver them, but for general merchandise the mechanics of that are “quite different” to other parts of the business.
General merchandise shares Ocado business functions such as finance, HR and customer services. The technology, of course, is provided by Ocado, while the other functions of operations, marketing and so on have all been brought into a separate general merchandise team. These skills are then utilised across the different parts of the general merchandise setup with the small Fetch, Sizzle and Marie Claire teams able to call on the skills as necessary.
The teams can also target each other’s customers through different channels and on the separate sites while also promoting items to Ocado’s half a million active customers with minimal cost. (An active customer is one who has shopped on Ocado in the past 12 weeks.) Personalisation in terms of giving the customer an easy journey through the site is something which Matthews sees as being “key for successful ecommerce”. It’s an aspect which has been proven on the Ocado.com site and will be worked on this year on the destination sites.
The Fetch and Sizzle teams know a lot about customers if they already shop on Ocado so are able to eliminate a lot of friction from the shopping journey already. For example, the team already know customers’ delivery preferences. Consequently, the marketing directed at these customers focuses mainly on getting the product in front of them and telling them that they can have it delivered at the same time as their grocery order, whether that’s already been placed or is in the process of being compiled. Being able to add extra non-food products to an existing grocery order with just a single click without have to go through the checkout process again is something which Matthews sees as a key part of the strategy.
Another part is to put Ocado in front of Fetch customers, half of whom either shop with other grocers or don’t do their grocery shopping online. “Online is still a low penetration in the UK so we have a great in with the friction-free part of the business,” says Matthews.
He adds that Ocado is not too concerned about other entrants to the online grocery market since anything which grows the message about the convenience of grocery shopping online and increases the number of shoppers using this channel is good news for all players. “When newcomers come we’re confident in our abilities,” says Matthews.
Ocado is also not shy of innovation. As a company which set up without the constraints of legacy systems of older retailers, it can take advantage of developments in the market and its own way of automating to be more cost effective and to seek more customer-friendly ways of doing things. This enables it to retain customers and deliver a great experience at lower costs.
“Innovation is important in almost every dimension. We look at innovation, in particular technology and logistics innovation, both as a way for us to dominate cost and to get very efficient at what we do,” Matthews explains.
“Ecommerce is a scale game, and there’s no question that there’s significant scale advantage of being able to invest in these technologies and processes that allow you to operate on a lower cost basis, but at the same time that same innovation enhances the customer experience. These normally go hand in hand. Our innovation allows us to operate a very high customer experience without spending a lot of money.”
Ocado seeks to automate what it can. Where there’s a human intervention, it asks whether a machine could do it better, such as loading vans, allocating things in a warehouse and rostering. “We’ve done most of that,” he says. The company continues to work on small improvements, such as if someone is walking past something on their way from point A to B and someone at point B needs it, they will be asked to pick it up.
“The other part of general merchandise is that we want to invest in innovation once and re-use it in multiple ways,” says Matthews. This is reflected in how it is using its fulfilment technology across the business in the different CFCs. Also, with agile software development, Ocado can start small, try out ideas (it carries out 10 deployments a week) measure and then invest more or less, depending on the outcome. Few of its developments are as “big bang” as the Marie Claire Beauty launch will be, but by analysing customer behaviour, as well as what they are saying, the company can test, learn and continually improve the experience.
Innovation is improving the supply chain and having a beneficial impact on customer service, with automation speeding up the whole process. As the number of warehouses grows, lead times will reduce further. Automation also offers accuracy. Its use on the front end in the guise of CRM, websites, interfaces and mobile apps offers customers time back by providing a hassle-free shopping environment in which Ocado puts the right products in front of them. “End-to-end, the customer should be able to get the products very rapidly in their own home without thinking too much about them,” says Matthews.
While all eyes are on the company signing an international supermarket to its platform, it continues to grow consistently as a retailer in its own right. The past year has seen its general merchandise business grow at a faster pace than groceries and 2016 will see it move its technology from pureplay to omnichannel as Marie Claire Beauty opens the doors to its flagship store in London simultaneously with its launch online.
“We wouldn’t be as good as a technology company if we weren’t a retailer too,” says Matthews. If Ocado can keep a firm eye on both parts of the business without dropping any balls then it will continue to innovate, improve and profit from the growing online and grocery markets. The next year certainly promises some interesting developments for the company and will provide a lesson for the industry in economies of scale and holding out for the long term.
James Matthews will be presenting on ‘Connecting the dots between supply chain and customer experience’ at the InternetRetailing and eDelivery Expo on 27 April. Full details can be seen at www.edeliveryexpo.com.