Recently the Wall Street Journal reported that Kroger has struggled to come to grips with the impending online grocery upheaval. While Kroger has tried many new things – from testing digital shelving to embarking on autonomous vehicle delivery, one Kroger investment stands out from the others – Ocado, the UK-based online grocery retailer that specializes in direct-to-consumer automated fulfillment.
The belle of the ball at Shoptalk 2018, Ocado burst onto the scene, bringing with it hopes of unbridled potential for the U.S. market. But, now, flash forward one year later and there are still many open questions about Ocado. Is it worth all the hype? Is it the Tom Hanks of grocery innovation? Or, are we looking at something else? More on that in a minute.
Ocado Debuts in 2018
I will never forget the day as long as I live. There I was at Shoptalk 2018. I had just finished hearing Nike present on the mainstage and up next to present was a company whose name was unfamiliar and hard to pronounce.
That company was Ocado.
It was a surreal experience because nearly 30 percent of the audience filed out of the auditorium after Nike\’s presentation thinking they would not see anything of value from this company of which they had never heard. But, boy oh boy, were they wrong.
Ocado CEO Tim Steiner dropped the mic on the crowd that day. He regaled the audience with slide after slide of how successful his company was with e-Groceries over in the UK, how the market continued to grow, and how robotics would be an ever-present part of the Ocado grocery fulfillment secret sauce. The entire crowd oohed and awed throughout the presentation, and especially so when he dropped this robot-filled video on all of us.
Right after Mr. Steiner finished his speech, a former colleague of mine turned to me, took out his keys, and dropped them on the floor, Ben Affleck-style in Boiler Room.
Then just a few short months after Shoptalk, Kroger announced an investment in Ocado, a move some analysts even went so far as to say was \”the best investment the Kroger Company\’s ever made in the last 25 years,\” which may be more of an indictment against Kroger than an endorsement of Ocado, unfortunately. Regardless, excitement abounded. The robots were finally coming, and Kroger wasted little time announcing further plans at the start of 2019 to open a number of new Ocado-style grocery warehouses over the next few years.
But What Do We Really Know About Ocado?
Like so much amid the oft-cited and ridiculous \”retail apocalypse\” refrain, glossy first appearances can be far different than reality. It is easy to get caught up in the allure of Ocado – the fancy robots, the new business model and even the cool British accents. But human psychology sometimes leads us to make more out of new things just because they are exactly that, new and unfamiliar.
It reminds me of how Hollywood talent scouts likely felt back in 1983, trying to predict the careers of two exciting young actors – Tom Hanks and C. Thomas Howell.
Now, we all know Tom Hanks — Forrest Gump, multiple Oscar winner, member of the Saturday Night Live Five-Timers Club — but it was not always crystal clear that the Bosom-Buddied Mr. Hanks would be the star that he turned out to be. Take one look at this clip from a guest appearance Hanks made in Happy Days as a karate enthusiast with a Fonzarelli-sized score to settle, and, let\’s just say, stardom for Mr. Hanks was not a foregone conclusion.
But, in 1983, the world did appear to be the oyster, for C. Thomas Howell. After a small role in E.T. in 1982, Howell secured the lead role of Ponyboy Curtis in Francis Ford Coppola\’s 1983 adaptation of The Outsiders.
Howell was smoldering in the role. He made young women and men everywhere swoon and envious sleeveless jean jackets. It wouldn\’t have been crazy to bet on Howell over Hanks back in 1983.
Is Ocado Howell or Hanks?
Sadly, Ocado may be more Howell than Hanks. Ocado, like Howell, burst onto the scene, with a bigger resume (E.T. = UK success), a stronger brand name behind it (Kroger = Coppola), and bigger fanfare, but, in the end, it too could suffer the same ignominious doom that was Howell\’s horrendous career choice to star in Soul Man – quite possibly the worst idea for a movie plot in human history, and one not even Rae Dawn Chong could save.
Its hype notwithstanding, Ocado has some deeply rooted issues, both in terms of economics and in terms of the psychology of how people actually want to shop. In a large, suburban sprawl market like the United States, centralized fulfillment approaches to direct-to-consumer grocery fulfillment, no matter how automated, robotic, or efficient, the packing and picking process presents a number of challenges. They are incredibly capital intensive to build, do little to defer last-mile delivery costs or to shorten lead times for delivery. We live in a world where consumers have ever-increasing expectations about speed. The Ocado model may work overseas, but the population density in and around the delivery centers there is a far different dynamic than here in the United States.
Other models are far more flexible and agile in their approaches to solving these problems. Shipping direct-to-consumer from smaller, more hyperlocal and automated micro-fulfillment centers, for example, has a number of advantages over the Ocado model. Micro-fulfillment centers are far cheaper to implement, still give retailers similar pick and pack efficiencies, and they also put retailers closer to their customers from a last-mile cost and speed of delivery perspective.
The concept of micro-fulfillment appears to be gaining significant traction too, as Walmart, Ahold Delhaize, and Albertsons have all announced pilots within the space. While building large Ocado warehouses takes time, retailers can stand up and adapt micro-warehouses quickly and cheaply as they run additional experiments year over year, lending themselves to prairie fire-like adoption, once perfected.
Micro-fulfillment Is the Real Forrest Gump America Wants
Micro-fulfillment also does one other important thing that centralized Ocado-style fulfillment will never do – it gives retailers the ability to separate the acts of shopping from buying. Throughout retail\’s history, consumers have had to shop and to buy/acquire products within the same mental movements. Consumers have been de facto warehouse pickers, picking items off shelves at their local grocery stores for years. Now, because of the rise of mobile technology, consumers, and millennials especially, no longer have to play this role. They can shop and have the entire world available to them, at a press of a button and on their schedules. They can shop however and whenever they want.
As I have written for The Robin Report, the separation of shopping and buying is the definition of New Retail, and it is already on display overseas in Alibaba\’s Freshippo supermarket. Ocado-style fulfillment, however, does not allow this separation.
Within a mobile-guided shopping experience, consumers can shop at their leisure and elect to acquire products however they want. They can pick products themselves old school or they can simply scan products as they shop and ask a grocer to deliver those products to any spot of their choosing. Micro-fulfillment allows orders to be ready and waiting for consumers anywhere onsite, at their cars, or at their homes.
With Ocado-style fulfillment, the only option consumers have is for products to be delivered to their homes simply because it would take too long to have products picked and packed in an offsite warehouse and then brought anywhere a consumer desires while still on site or within a store.
Therefore, regardless of all the excitement surrounding Ocado, Kroger\’s investment, and even the coming robot revolution that Ocado\’s videos portend, chances are that when we look back decades from now other technologies will come to the fore to give retailers what they need economically and consumers what they want psychologically.
It is far likelier that our industry will come to know micro-fulfillment as the Tom Hanks of our age, while Ocado, like the once famous C. Thomas Howell, instead becomes destined for the retail equivalent of character roles like \”Hilltop Resident\” in the Walking Dead.