Tech

Ocado’s robot future has one major flaw: cheap, squishy humans

Ocado’s robot future has one major flaw: cheap, squishy humans


The pandemic has been kind to Ocado Retail. As a series of lockdowns forced huge numbers of people to shield, the online grocery business – whose website and app crashed amid the panic buying of March 2020 – reported a 35 per cent increase in revenue to £2.2 billion in the year to November.

The business may have parted company with long-term supply partner Waitrose during the past year, but customers clearly liked the joint venture with Marks & Spencer that replaced it. The first three months of 2021 allow a direct comparison with pre-pandemic activity: revenues were up by 40 per cent while the average number of weekly orders received by the business increased by 8,000 to 329,000. In the company’s first quarter trading statement, Ocado Retail chief executive Melanie Smith said the numbers reflect the fact that “large numbers of UK consumers have made a permanent shift to online grocery shopping”.

Based on these results, Ocado Group has achieved its 20-year ambition of disrupting the grocery shopping sector without using bricks-and-mortar stores. Only Ocado isn’t just an online retailer, and its wider results tell a very different story. In fact, the group’s technology and robotics arm dragged during the pandemic: in the year to November, revenues in Ocado Solutions rose by 14 per cent but earnings fell by 38 per cent. Overall, Ocado Group made a loss of £44 million for the year.

For investors the fact that the business, which listed on the London Stock Exchange in 2010, has yet to make any significant profits is problematic. Russ Mould, investment director at AJ Bell, notes that Ocado’s share price has been “phenomenally successful”, increasing by more than 1,000 per cent since the company floated. But the fact it has started to come down since the start of this year, from a January high of 2,808p to 2,070p, could be a sign that investors are beginning to lose patience with the business, he says.

“The market is turning because investors are moving away from long-term growth stocks – they want recovery stocks,” Mould explains. “People will go back to pubs and cinemas – those companies will show much more growth and those companies are a lot cheaper than Ocado. People are moving away from expensive jam tomorrow to cheaper jam today.”

The fundamental problem Ocado faces is that the high-growth tech business that investors backed will take a long time to start making a return. In the UK, the business uses robots to fulfil orders placed by customers of Ocado Retail and Morrisons, which Ocado has been delivering for since 2013. At customer fulfilment centres (CFCs) in Bristol, Dordon and Erith thousands of robots zip across grids of goods, picking items at speed to be dropped into bags and delivered by the company’s human staff. The business has other sites in Canada and France and its Andover CFC, which was razed by fire in February 2019, will reopen later this year.

Group chief executive Tim Steiner says 15 more warehouses are currently being built – a deal with American retailer Kroger alone will require 20 CFCs to be constructed and kitted out over a three-year period. He envisages the company controlling 60,000 robots, which will allow grocery clients to deal with orders faster and cheaper than ever before.

But no empire can be built in a day, and while both current and future clients wait for the infrastructure to be put in place, there is little Ocado can do but spend, spend, spend.

Steiner is convinced Ocado’s investors will be willing to wait it out. “Shareholders bought into our vision, and we are very well capitalised,” he says. Like Mould, however, Richard Hunter, head of markets at Interactive Investor, is not so sure. “The robot side is a very exciting development, but in terms of the share price, it’s getting near the point where the company has to deliver,” he says. “Pressure will ratchet up; it’s starting to slowly mount.”

While Ocado waits for distribution centres to be built and robots to be deployed, rivals who are fleeter of foot have been moving in on its territory. Despite trialling its one-hour delivery service Ocado Zoom two years ago, the company is still only able to offer the service in certain areas of West London. Steiner says the plan is to have 20 Zoom locations that together would generate £400-600m of retail sales, but that the plan will take two to three years to roll out.

Deliveroo, meanwhile, quickly mobilised 15,000 additional riders last year as demand for its takeaway service soared and it also moved into the high-speed grocery-delivery sector. Deliveroo has also signed deals with retailers across the UK including Waitrose, Morrisons, Aldi and Co-op. It was effectively able to do overnight what Ocado’s robots will allow it to do in time.

Ocado was caught off guard, says GlobalData senior analyst Tom Brereton, because it has “built an impressive but rigid system for growth in an expected manner” that was not able to cope with growth that came in an unexpected manner. Or, to put it another way, Ocado is making a long play with robots while many of its competitors are flooding the market with cheap, squishy humans.

Despite this, Steiner maintains there is no comparison between the online services being offered by Deliveroo and Ocado. “Zoom is about creating a customer proposition that no one else can match,” he says. Ocado is creating the online equivalent of a high-street supermarket selling 15,000 items; Deliveroo is creating the online equivalent of a corner shop. As a result, Deliveroo is an expensive way for customers to pick up one-off essentials, while Zoom has the long-term ambition to fulfil orders quickly while using technology to cut costs.

Though early signs are promising, whether Steiner is right or not is moot until such time as the technology has been built and brought into service. In the meantime, the slow roll-out of distribution centres is allowing low-tech competitors to outpace Ocado. Amazon is a case in point. After spending many years investing in its own distribution centre network, its infrastructure is such that it could pose a serious threat to Ocado’s ambitions. Amazon could, Hunter says, “park its tank on any lawn it fancies”.

Brereton says that scenario would result in “two tech companies battling it out to provide other retailers with better logistics”. Michael Hewson, chief market analyst at CMC Markets, thinks the stakes could end up being even higher. “There’s been a dramatic shift towards online grocery shopping around the world, but the big question for me is do they [Ocado] stop there or do they go into general merchandise,” he says. “Amazon specialises in general retail but it doesn’t do food. Its speciality is very much general retail; Ocado’s speciality is very much food retail. You’ve got to think there’s some kind of cross-over there.”

Steiner defends Ocado’s long-term business plan as sound because, once the upfront investments have been made, it can offer other retailers “a service that is cheaper than doing the work themselves”. And, crucially, it needs to do it at a profit.

The end-game is to tap into a global grocery market that is worth trillions of pounds. Like Smith at Ocado Retail, Steiner is convinced that the shopping habits people have developed over the past year are here to stay. If he’s right, Ocado’s grocery arm will continue to thrive while demand for its technology could prove limitless.

However, a report issued by McKinsey at the end of last year found that while the share of online sales will continue to grow at a faster rate than before the pandemic, not all shoppers will keep buying from virtual stores as countries move into the “next normal” phase. For Hewson, that poses a challenge for Ocado. “Will it be able to maintain the growth of the last 12 months? [Retail] has performed very, very well, but the last 12 months have been unique,” he says.

Ocado Retail might have done well out of Covid-19 but, in a way, the timing of the pandemic could not have been worse for a wider business that is still a long way off being ready. “For Ocado it would have been better if Covid had happened in five years’ time,” Brereton says.

More great stories from WIRED

🇪🇺 Blood clots and misinformation. Europe’s AstraZeneca debacle will have devastating consequences

📦 Brexit is causing havoc for the UK’s legion of dropshippers

📱 Upgrade your device. The best iPhone 12 cases you can buy right now

🔊 Listen to The WIRED Podcast, the week in science, technology and culture, delivered every Friday

👉 Follow WIRED on Twitter, Instagram, Facebook and LinkedIn

Published at Mon, 29 Mar 2021 09:57:59 +0000