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Ocado wages a grocery war against Amazon, Walmart and Alibaba

PANIC IS SWEEPING through supermarket aisles. Profits are meagre, convenience is king, discounters are rife. Even Amazon, Walmart and Alibaba, the world’s three biggest retailers, are trembling. No one has fully mastered the art of selling groceries online. The business represents just 2.3%, or $160bn, of a worldwide grocery market of $7trn. As that share rises, as it will surely continue to, it could be life or death for some in the industry.

In the midst of this mêlée is a fast-talking Brit, Tim Steiner. The firm he co-founded, Ocado, has shaken up the British online retail market, and it is trying to do the same internationally. By selling expertise from almost 20 years as a pioneering online grocer to supermarkets in America and elsewhere, he wants to help them become a fourth force in the industry—able to resist the big three.

His patter is honed by a career battling doubters (an analyst once put him down with the quip: “Ocado begins with an ‘o’, ends with an ‘o’, and is worth zero”). Sceptics still harbour deep reservations. Though Ocado has more than tripled in value in the past two years to £7.5bn ($9.6bn), its share price has plunged recently. But his insurgency shows how the battle to dominate online groceries remains wide open. Ocado has as good a chance as anyone.

Grocery is a sadomasochistic business. Sellers can count on stable revenues but have little margin for error on sourcing, price and waste. Shoppers suffer from a retail version of Stockholm syndrome. They are lured by grocers with the promise of savings, only to be fleeced. Shops make them do the work of picking the produce and bagging it. They set traps in the aisles—in the form of strategically placed celebrity magazines or freshly baked doughnuts—to slow shoppers down. Yet customers continue to return for more, despite having ever more options to order online and have groceries delivered to their doorstep. In China and America, online grocery shopping is a miserly 3.8% and 1.6% of the total, respectively.

Mr Steiner, a former Goldman Sachs bond trader, has pulled off the rare feat of making home-delivery both tolerable for shoppers and profitable for sellers. He knows how to squeeze the last farthing out of a tomato and has turned the sorting of groceries in warehouses into a science—specifically, clever robotics—which has kept costs competitive. Partly thanks to Ocado, Britain trails only South Korea and Japan in its embrace of online grocers.

Earlier this year Mr Steiner persuaded Marks & Spencer, a British retailer, to pay £750m for a half of Ocado’s domestic online-grocery business. The money is helping develop his firm’s newer, more lucrative international venture, which licenses the know-how to build modular high-tech warehouses that can be scaled up as needed. The biggest deal, struck in 2018, has been with Kroger. The American supermarket chain aims to order 20 Ocado customer fulfilment centres (CFCs, or, as Kroger calls them, sheds) by 2021, far more than the four that Ocado has so far erected in Britain (the newest burned down this year). Despite their recent slide Ocado’s shares still trade like a software firm’s, not a supermarket’s. JPMorgan Cazenove, a broker, said last month that the firm would need to announce 126 CFCs to justify a recent valuation of £9bn, three times the number it has planned.

Kroger’s sheds, which may take up to five years to complete, already give a sense of the emerging grocery battle lines. They will be big, up to about 33,000 square metres (350,000 square feet), though they can be flexed up and down. They will sit on the edge of cities. Ocado aims to make up for the long drives to deliver groceries by speeding up its robots, packing crates of 50 items in six to seven minutes. There will be no time-pressed “pickers” elbowing shoppers aside to fill an online order, as in other supermarkets.

But the Ocado model, which works well in urban Britain, is as yet untested in more sparsely populated places. In America and China others are moving in a different direction—and in a hurry.

In 2017 Amazon sent shivers down American grocers’ spines by buying Whole Foods. On November 11th it confirmed that it was opening its first grocery store in California that is not part of that upscale chain. Last month it launched free delivery of Amazon Fresh, a grocery service, to its Prime members. So far its bark has been worse than its bite. By one estimate only 6% of its sales are perishables, compared with 65% at a traditional grocer.

Amazon’s domestic rivals are making existing supermarkets the kernel of their online operations, either for picking up orders or delivering them. Close by will be micro-fulfilment centres, which will seek to emulate Ocado’s efficiency, but cut down on travel times. The model is Walmart, which cited sharp growth in online grocery from its supercentres in America as a reason for higher sales this summer. Last month it launched a service in which employees in three American cities can deliver groceries directly to customers’ fridges when no one is home, using smart-entry technology and wearable cameras. It also promises same-day delivery under a membership programme like Amazon Prime.

Open sesames

Alibaba’s high-tech Hema supermarkets in China are more cutting-edge still. They use QR codes on fish to validate freshness, enable app-based shopping, have robots aplenty (naturally) and offer 30-minute delivery within a small radius. Yet it is unclear if Hema’s technology will succeed where armies of cheap labour, ready to sort, pick and deliver groceries, have mostly failed.

No one has as yet quite cracked the problem. More wizardry, perhaps virtual-reality headsets, may be required to make internet grocery shopping as intuitive for people as it is offline. But the incentives for grocers to press ahead are huge. No relationship in retail is as intense as that of shoppers with their supermarket. Few firms have as many eggs in the online-shopping basket as Ocado. If things do not work out, at least the Kroger deal has made Mr Steiner a rich man. If they do, he may be a rare example of a British entrepreneur with global ambitions who is not off his trolley.

This post was originally posted at https://www.economist.com/business/2019/11/16/ocado-wages-a-grocery-war-against-amazon-walmart-and-alibaba.

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