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Ocado unveils one-hour delivery pilot as it sees grocery sales lift, but the costs of supplying services to third-party retailers hit profits

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Ocado today announced a one-hour delivery service as it reported a lift in sales but widening losses after what it describes as a “transformative year” for the business. 

Ocado Zoom will enable the retailer to deliver a range of more than 10,000 lines, built on micro-centralised fuflfilment, within 60 minutes. “We’ve built a test site that will launch to customers in March in West London and over the coming years we expect to mature this offering and make it a part of our offering to our international customers in order to enable them to offer more immediacy in their core markets,” said Ocado chief executive Tim Steiner at the retailer’s full-year results presentation today.

During 2018, the online grocer and technology business licensed its technology to retailers around the world, including Kroger in the US, and saw others go live with online businesses built on its ecommerce and fulfilment systems. While its own grocery sales and income from services to other retailers grew, the costs of investing in customer fulfilment centres and technology both for its own retail business and those of its third-party retailer customers also grew, with the result that pre-tax losses widened.

Ocado, whose retail business is ranked Top100 in the latest IRUK Top500 research, reported group revenue of £1.6bn in the year to December 2 2018. That was up by 12.3%. Retail sales were also up by 12% at £1.5bn, while its revenue from technology solutions was up by 15.8% to £123m. Pre-tax losses widened to £44.4m from £8.3m a year earlier, after capital investment of £213.8m, largely in customer fulfilment centres (CFCs) supplying its own retail business and those of third-party retailer customers at home and abroad. 

During the year, the business signed partnerships with North American retailers Sobeys and Kroger, and with ICA in Sweden to use the Ocado Smart Platform along with robotic infrastructure solutions. It is now committed to opening 23 CFCs for its retail customers in coming years. It also took forward its work with Group Casino in France, whose first customer fulfilment centre is now under construction south of Paris, while Bon Preu has launched its online business in Catalonia, and its longest-standing customer Morrisons is now delivering from its latest, fourth, customer fulfilment centre at Erith, north London which, says Ocado, will be the largest automated grocery fulfilment centre in the world when it operates at its full £1.2bn capacity. So far it is processing more than 30,000 orders a week. 

Robotic picking is set to go live in its Andover CFC in the coming months, while the headcount of Ocado Technology has risen by 76% over the last three years, including 300 programmers taken on in 2018. It has filed 395 patents over the last three years covering innovations from robotics and machine-learning to AI and routing systems. 

Within the Ocado grocery business, the retailer says it now offers the widest range of any UK grocer, including reduced plastic and no-sugar aisles, and leads the market for delivery punctuality (94.9%) and order accuracy (98.8%). General merchandise sales “grew strongly” over the year.

“Our performance last year was the result of many years of focus, dedication and perseverance; what we have called our ’18-year overnight success’,” said Steiner. “Our growth story, however, is only just beginning. We now have in place a platform for significant and sustainable long-term value creation as the leading pure-play digital grocer in the UK, a world-leading provider of end-to-end ecommerce grocery solutions, and as an innovative and creative technology company applying our proprietary knowledge to a range of challenges.

“Our transformation journey is well underway with increased cash fees earned and greater investment as we executive on behalf of our partners. Creating future value now will involve us continuing to scale the business, enhancing our platform, enabling our UK retail business to take advantage of all its opportunities for growth, and innovating for the future.”

Commenting on today’s announcement, Kevin Edwards, global client strategy director at global affiliate network, said: “Despite claims that Ocado Zoom is a result of consumer demand as opposed to a response to the threat of Amazon, it’s hard to think that the rolling out of this service is anything other than a direct challenge to Amazon’s Prime Now, which offers a free two-hour delivery service.

“It just goes to show the level of influence that Amazon has on the market, and the alarm that it instils in other retailers who feel the need to go toe to toe with any service that it rolls out.

“Ocado this morning announced that its revenues had increased by 12.3% in 2018, but its losses [after tax] had grown from £9.8 million in 2017 to £44.9 million the following year. As online shopping becomes more central to how consumers do their weekly shop, retailers and supermarkets alike are waking up to the fact that they must invest more in this sphere.

“Offering a one-hour delivery service is a great way to tap into the time-restricted modern consumer, whilst also undercutting Amazon’s delivery promise. Trust in Amazon is shaky as it is, so if Ocado can pull off this one-hour delivery without fault, then they could be on to something special.”

Image courtesy of Ocado

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