The emergence of Takeoff Technologies, a grocery ecommerce pretender, has driven Ocado shares down and rattled investors. Retail Week looks at whether the new kid on the block could take the UK grocery pureplay’s delivery crown.

US-based grocery ecommerce start-up Takeoff Technologies revealed it had struck a partnership with Canadian supermarket giant Loblaws earlier this week. The news followed another overseas deal Takeoff pulled off in August with Australian grocer Woolworths. 

Takeoff, based in Boston and founded in 2016 by two Harvard Business School alumni with Wall Street experience, is on the surface a similar grocery ecommerce business to UK giant Ocado, in that it uses automation to fulfil ecommerce grocery deliveries.

However, whereas Ocado has invested heavily in its own intellectual property and seeks to make deliveries from large, automated customer fulfilment centres, Takeoff’s proposition is smaller in scale.

It focuses instead on ‘micro-fulfilment’, automating the pick-at-store model for online deliveries favoured by Tesco, for instance. The UK’s largest grocer recently said it would be building 25 ‘urban fulfilment centres’ over the next five years. It plans to complete three by the end of 2020, with the first to open in West Bromwich in March.

Having also run trials in the US with international powerhouse Ahold Delhaize and Albertsons, Takeoff additionally operates two micro-fulfilment centres with regional food retailer Sedano’s in Miami – one of which it said was “the world’s first robotic supermarket”.

Takeoff’s rapid rise in global grocery ecommerce has had a dampening effect on Ocado’s share price in the UK as it seeks to strike international deals with retailers to use its technology, as it has done with Kroger in the US.

Following a bearish note by broker Jefferies in the US, Ocado’s share price slid by as much as 20% on Monday but has since rallied.

Is Ocado’s crown slipping, or will Takeoff Technologies ultimately fail to get off the ground?

Liftoff

Based in the New England technology hub of Cambridge, Massachusetts, Takeoff was co-founded by Max Pedró and José Vicente Aguerrevere.

Aguerrevere, chief executive, cut his teeth on the European desk at investment bank Merrill Lynch before spending eight years with US-based technology consultancy Booz Allen Hamilton.

Pedró, the start-up’s president, spent more than a decade at Wall Street luminaries such as Citigroup, McKinsey and Wells Fargo, before a seven-year stint as vice-president of international financial services at Walmart.

Takeoff1

Takeoff has been vocal in calling Ocado out as a competitor

The two have developed an automated micro-fulfilment system, utilising automated pickers designed by US-based robotics firm Knapp. Once orders are placed, a robot takes products off in-branch storage shelves and transports them to a member of staff, who then manually packs the order.

The proposition is not only faster than traditional pick-at-store fulfilment, but it is also designed to be effectively bolted into the existing physical footprint of stores.

Takeoff says a micro-fulfilment centre can be added to an existing store in as little as 10,000 sq ft of space. For comparison, the average size of an Ocado automated CFC is around 240,000 sq ft.

The start-up has been vocal both in calling Ocado out as a competitor and claiming that its proposition is cheaper for grocers to implement as well as quicker to build.

Speaking to US publication Grocery Dive last year, Pedró said: “Ocado takes two years to open a facility, but we do it in three months. We can develop very quickly because we’re using the underutilised space in the supermarket.”

As IGD head of online retail insight Simon Mayhew points out, Takeoff’s model has several plus points when compared to Ocado’s proposition.

“Takeoff Technology’s solution uses vertical racking, makes better use of stores with high online demand and excess in-store space and features back of store picking, which causes less disruption to offline shoppers,” he says.

IGD estimates a micro-fulfilment centre costs about $3m to $5m and takes less than 12 months to build. “It’s quicker as it’s basically racking with clever technology,” says Mayhew.

Despite that, Mayhew notes the model also has weaknesses. For one, the system handles a SKU count of around 15,000, compared to more than 54,000 with Ocado. Only 80% of these SKUs – around 12,000 – are automated, with the remainder needing to be manually topped up. Ocado’s system meanwhile is fully automated.

At a recent investor day, Takeoff maintained that its system cost just 14% of the total value of a grocery ecommerce delivery, compared to around 23% with a ship-from-depot model as per Ocado.

However, head of European retail at broker Bernstein, Bruno Monteyne, has questioned those figures: “[Takeoff] makes lots of cost claims that don’t make sense to us. They have not been able to confirm the productivity savings yet. A Takeoff marketing document is no substitute for cost analysis”.

The future of grocery ecommerce?

Despite some limitations, micro-fulfilment technology being pushed by start-ups such as Fabric and Walmart partner AlphaBot as well as Takeoff, has been generating a lot of interest from investors, particularly in the US.

At the end of September, Takeoff secured $25m in series C funding, led by Forrestal Capital, in exchange for a 5% stake in the business. The business has a current valuation of $500m and has raised more than $80m since 2016 in private equity funding.

The rapid rise of start-ups such as Takeoff has unsettled some Ocado investors, particularly twinned with speculation that Kroger’s commitment to building Ocado CFCs was beginning to soften.

This has been fuelled by what Monteyne calls “wrong data points” being used by investors.

He believes some investors decided the fact that Kroger had only unveiled the location of five of the 20 CFCs it committed to from Ocado in 18-months was a sign the US supermarket chain was getting cold feet on the deal.

“Ocado’s is a very good proposition and, in the UK, it works very well. In the US, that proposition maybe isn’t so strong”

Neil Saunders, GlobalData

However, Monteyne points out that, alongside confirming five CFC locations, Kroger has already ordered a further five. Only yesterday, after Monteyne’s note, Kroger confirmed the location of a sixth CFC in Pleasant Prairie, Wisconsin. This has caused Ocado’s share price to rocket upwards faster than any other business in the FTSE 100. 

This begs the question of whether Takeoff, a business that’s been around for less than four years, with just 100 staff, can hope to compete with the levels of investment and experience at Ocado?

Managing director of GlobalData Neil Saunders believes so, in the US at least. He points out that micro-fulfilment is a “more sensible solution” for many grocery retailers in the US, given the huge landmass and relatively low population densities outside major cities.

“Micro-fulfilment is, in the context of the US anyway, a lot more sensible for existing retailers. These big fulfilment depots, they may work in areas with high population density, but they’re still tied to a relatively limited catchment area,” he says.

“Ocado’s is a very good proposition and, in the UK, it works very well. In the US, that proposition maybe isn’t so strong. In order to really be able to fulfil online grocery deliveries successfully, you need to tie fulfilment to stores.”

However, chief commercial officer at Practicology Jeremy Wilson believes both Ocado’s CFC model and Takeoff’s MFC model can coexist in the same markets.

“I don’t see Takeoff as a direct threat to Ocado. It comes down to how different grocers want to approach the challenge of delivery fulfilment. The likes of Tesco have adopted a pick-from-store model, and are very unlikely to move to a big, CFC model. By contrast, the likes of Morrisons and M&S clearly favour the Ocado CFC model.

“If the market was to become a bit more divergent, Takeoff might emerge as a competitor if they push into new markets. But, where there’s an existing Ocado proposition, I don’t see it as a competitor directly. It’s just an alternative business model,” he says.

Looking ahead, Takeoff recently announced version 2.0 of its existing micro-fulfilment solution, which it says will roll out in 2020 – which it says will allow for 6% faster picking and increased storage capacity.

It also has plans to introduce autonomous mobile robots called “open shuttles”, which will move independently within its centres transporting bags of groceries.

While Takeoff’s position strengthens daily it seems there are enough opportunities for the two businesses to coexist. However, the emergence of a viable, automated alternative means Ocado’s dominance in the grocery ecommerce sphere is now being seriously challenged.