University of Manchester | Manchester Business School
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Online grocer becoming more mass market, says Ocado chief

Vital Topics 2012

Ocado chief executive Tim Steiner insisted the online grocer was "not a posh service for posh people but a smart service for smart people" at our Vital Topics lecture. "If we are seen to be expensive it is a false perception. People think we are expensive but we are not, and we have to get that message out."

Ocado is the country's largest independent online grocer and last year saw sales rise 16 per cent to £643m. However the company still has only a fraction of the £156bn UK grocery cake, and Steiner is determined to increase his share. "Today we have 0.4 per cent of the market and deliver as many orders every minute as we did every day when we first started the company. But if we get to a 3 per cent share we will be the same size as Somerfield. Everywhere we can we are offering a better service for customers. We are becoming more mass market."

Steiner spoke candidly about the daily logistical challenges he faced in a sector that is becoming ever more cut-throat. For instance Tesco recently said it planned to expand its online grocery operation with the opening of more so-called dark stores, stores without customers that simply fulfil online orders. Meantime competition is also increasing between Waitrose and Ocado even though the two continue to share a supply agreement.

Steiner said a few years ago the company took the conscious decision to start taking on Tesco on price because of the perception that Ocado was expensive. "We began price matching, identifying products that we both sold and then matching their pricing. For the first two weeks Tesco dropped their prices on a number of lines, but we held our ground."

Steiner said that both Sainsburys and Asda had subsequently launched matching guarantee schemes, in so doing collectively eroding the perception of price advantage that Tesco had. "Today our message to customers is 'we will take away a significant chore from you but charge the same price as Tesco'. It is a hard message to get across."

The company hasn't had the easiest ride in the City since floating two years ago, not helped by capacity constraints at its Hatfield distribution centre which have hit profits, but Steiner says the criticism is "all part of the journey". "It is certainly easier to run a company privately and you have to be incredibly thick-skinned to run a public company. However I don't know if we could have raised the money we needed to expand the business in a private environment back in 2010, they were difficult years to raise money in. What has changed since flotation is not managing the shareholders, it is managing the people who seem to think they know all about us." Steiner said ultimately it would be customers who decided how big the firm would be, not the views of those in the City.

Talking of shareholders, Ocado has been the source of much speculation over the years that one of the big retail giants could buy it. Steiner admitted at the lecture that it was "always a risk" and that someone might wish to take advantage of the company's technology.

That technology is unsurprisingly at the heart of the company's model which enables 95 per cent of products to be available for next day delivery and 99 per cent of products to be delivered exactly as ordered. The company is currently building a second £215m distribution centre north of Coventry which is due to open next year.

Steiner said the company wrote all its own software and that it was as much a technology as retail business. "Take our vans. Our systems tell us exactly what the roads are like across the country and exactly how busy they will be at particular times. We are constantly reoptimising routes and we are incredibly efficient. Our software drives that. We get new software and ideas out to customers very quickly. Likewise if we have a problem at 4am we are not on the phone to some Californian help desk."

Steiner added that the firm was also prepared to go against the grain. "The current wisdom is that in a large warehouse you never change your software, but we do it continually."

With capacity set to double once the second distribution centre comes on stream, Steiner wants to be doubling the rate of orders. "Our customers shop with us on average every two weeks, we want them to start doing it every week. The more data we have the more personalised we can be for our customers too. We have a huge team predicting orders for people."

He added that increasingly that demand will come via mobile apps. "We were the first retailer to launch a trasactional app for the iPhone and today we do 22 per cent of business over the mobile. Our customers want to shop with us whenever and wherever they want." Steiner added that the wider general merchandise market still had a long way to go online. "Start-ups are leading the way such as Asos in clothes or lovefilm in movies. We have a lot to prove and we need to turn on our new facility. We need to prove we can scale our efficiency."

John Pal, senior lecturer in retailing at MBS, says the challenge now for Ocado is to gain more customers, which is something other grocers should not think will not happen.

"There's a saying that the only constant in retailing is change and there is probably no better example today than that of Ocado. Whilst the company has had to deal with the brickbats of analysts and the like, there can be no doubt that it has made significant changes to the way online grocery retailing works. The fact that Ocado develops its own software is giving it a significant advantage."

Pal added that students of logistics will be aware of the square root law of inventory which states that the fewer stockholding points you have the less inventory a firm holds. "Ocado shows how this works in spades. And where the textbooks might state a firm can only excel on one or two dimensions, Ocado is making a compelling argument for excellence on price, service and range."

Watch Tim's interview >>