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Ocado, whose name appears to be inspired by the fruit avocado, was founded in 2000 as a pure-play online grocery retailer at Hatfield in the United Kingdom (UK) at a time when e-commerce was at a nascent stage and online grocery barely existed as a channel.
Two decades ago, many consumers were sceptical about the potential of the channel as traditional grocery supply chains were not well equipped to bear additional costs associated with serving online, and customer appetite was untested.
Contrary to popular perception, Ocado began to grow in the UK, increasingly leveraging the efficiency of proprietary technology designed to overcome the complexities of grocery shopping online.
These technologies — and new approaches to supply chain and logistics — have been key to taking Ocado from a UK pure-play online grocer, to an international technology solutions provider, partnering with some of the biggest grocers in the world’s largest modern grocery markets.
The start-up’s group of clients, known as partners, has grown in a few years to include the likes of Kroger in the United States of America (USA), Aeon in Japan, Auchan in Spain and Poland and most recently, Lotte Shopping in South Korea.
Luke Jensen, the Chief Executive Officer (CEO), of Ocado Solutions, who has been leading its international division since 2017 that partners with retailers worldwide, explained the utilisation of automation and artificial intelligence (AI) throughout its end-to-end solutions.
“Online grocery involves a complex range of challenges than online in other parts of retail. This is partly why it has lagged the growth of other channels. Fulfilment centres require multiple temperature zones (50 per cent of a grocery basket tends to be fresh food), and they need to manage a very fast inventory turnover. Add to this the heavy price competition in grocery, low margins, and huge product ranges, and you can get a sense of the overall complexity.
So, you can’t simply automate one task, or overcome one challenge, you’re solving multiple, complex problems throughout the supply chain. Ocado is the leader because we innovate across the board,” said Jensen, who has had a stint as a Senior Advisor with Boston Consulting Group (BCG) and Group Development Director at Sainsbury’s, where he was responsible for online and digital and all customer-facing digital activities.
He elaborated on the technical aspect of the start-up’s operations.
“Within our Customer Fulfilment Centres (CFCs) we operate different proprietary robotics as well as advanced machine learning/AI-based processes. Probably the most recognisable image of Ocado’s tech is robots operating on ‘the hive’. Typically, an Ocado CFC will feature thousands of bots working like a swarm across a giant grid allowing to pick a 50-item order in a matter of minutes.
A CFC is integrated to the rest of the platform, including our online shopping channels (webshop) and supply chain forecasting tools. So, we know in real-time how customers are shopping — informing both supplier ordering and inventory management in the CFC to most efficiently pack baskets and load vans. In the UK, we make around 20 million sales forecasts each day — driving hyper accurate operations and the lowest food waste in the industry.
“The final stage of the process — the last-mile delivery — is fully integrated to the rest of the platform and enables hyper efficiency route optimisation across delivery catchments. Our AI-driven routing algorithms make 14 million route calculations per second, meaning our partners can deliver their orders on time, no matter how busy it gets,” he added.
Jensen turned his gaze on the UAE grocery e-commerce sector, regarding automation and logistics and how it is different from other markets that Ocado operates in.
“The UAE online grocery sector is growing rapidly and is worth over $1.1 (Dh4.04) billion. The projected growth of the UAE grocery e-commerce market is huge, with a compound annual growth rate (CAGR) of over 22 per cent by 2025; much higher than any other channel,” he said.
He cited a recent Mastercard study that revealed about 73 per cent of UAE consumers have preferred to shop more online since the Covid-19 pandemic, and this is a trend that shows no signs of slowing.
Besides, a considerable proportion of the population are increasingly tech-savvy, which is driving demand. Internet penetration in the UAE is incredibly high, at 91.9 per cent, which suggests the region is primed for the growth of online grocery as much as any market.
Jensen explained a paradigm shift in the UAE’s grocery e-commerce sector.
“In the UAE, the main approach until now has been to use manual warehouses or to pick and pack items by hand in stores. This is typical of many markets across the world, particularly given the need to build fast capacity during covid. But interest and investment in automation, and new supply chain operations has grown hugely in the last few years.
It’s relatively easy to build more manual picking capacity (if there is availability of labour) to meet extra demand for online grocery, but it’s very hard to make a profit doing it. Most supermarkets ramped up capacity in the past few years by overlaying new labour processes and costs onto traditional grocery supply chains. In a margin tight industry, those costs have a major impact on profitability,” he added. Ocado is embracing sustainability from an economic and environmental point of view, pointed out Jensen
“Our approach has always been to look beyond the 20th century grocery model. We cut the length and complexity out of traditional supply chains by centralising fulfilment operations. We’re aggregating huge volumes of stock in single sites, enabling us to optimise our inventory management and delivery operations much more efficiently than if we delivered the same volume from multiple stores. In addition, we are bringing down big profit and loss (P&L) costs like food waste. Waste in our UK operations has been as low as 0.4 per cent of sales, compared to 2.5-3 per cent in traditional grocery.
Developing a sustainable, profitable and scalable online grocery sales operation was something many experts thought to be impossible. However, the continued growth of our UK business, Ocado Retail, is proof that it can be done,” he said.
“With earnings before interest, taxes, depreciation and amortisation (EBITDA) of 6.6 per cent in 2021; Ocado Retail shows what can be achieved both for customer quality, and for overall efficiency in the grocery ecommerce space. This is the proposition we are bringing to market in 10 countries worldwide,” he added.
How will the next five years look like for the automation and online grocery sector?
“It will be interesting in the next few years. While there are some exceptions, the grocery industry has historically failed to invest in the productivity challenge. Compared to other sectors of the global economy, and other retail channels, labour productivity growth in grocery has been slow for decades,” Jensen said.
“But a number of trends are now forcing the issue to the top of supermarket boardroom agendas. A steady increase in labour costs across major markets, challenges with availability of workforce, wholesale cost pressure and rising demand for online grocery are all pointing to the same question. Consequently, the moot point is how major grocers can maintain and grow their market share without increasing costs significantly or generating a knock-on impact for customers.
We expect to see significant growth in online grocery adoption and new approaches to fulfilment across the board. Online has long been the fastest growing channel in grocery, but the pandemic generated an upsurge in online offerings across the market to meet a huge increase in demand. The majority of the demand is sticking — and online is growing from a much higher base than ever before.
The grocers that invest in greater efficiency, and the best possible customer proposition will be the long-term winners in the market,” he added.
Ocado adapted these solutions to fit the characteristics of different markets across the globe, according to Jensen.
“Each market has its own specific characteristics, and as with almost any market where we operate, all customers set high benchmarks for quality across range, price, freshness and consistency.
Of course, there are some variances across markets, so grocers need maximum flexibility to meet a whole range of online grocery needs for shoppers, and to offer these services with maximum efficiency
Our platform is versatile. We build large, automated sites — distributing groceries across huge catchments. We can build networks of smaller sites to serve more direct and same day deliveries. We build micro fulfilment centres to serve immediacy orders within 30 minutes. And we deploy software to help our partners boost in-store manual picking productivity,” he said.
All of these are able to operate as an integrated network, generating huge supply chain efficiencies.
“We also look at specific markets and make changes to our platform to meet new challenges. For instance, we've just announced a major partnership with Lotte in South Korea where we are introducing multi-storey CFCs, which will support a more efficient use of available space in a high- population density market,” he added.
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