As Ocado unveils its first international tech and logistics deal, Retail Week looks at how it is revolutionising grocery fulfilment.
Andover is a small town on the banks of the River Anton, a stones’ throw from the Bombay Sapphire gin distillery.
The Hampshire suburban town with a population of around 65,000 is a world away from tech hubs such as Silicon Valley, New York and London, but it is there, tucked away in the rural Hampshire, where Ocado is aiming to redefine grocery fulfilment.
The etailer’s third customer fulfilment centre is the first to feature the well-guarded Ocado Smart Platform – the technology it plans to sell to retailers around the world.
One-and-a-half years after its initial self-imposed deadline elapsed, Ocado finally struck a deal to provide its online grocery “know-how and support services” to an unnamed European retailer.
The partnership was hailed as a vindication of Ocado’s strategy and persistence, three-and-a-half years after it started working on the smart platform that will also be used in its fourth warehouse in Erith, southeast London, opening next year.
A chessboard of technology
Speaking to Retail Week prior to the unveiling of the overseas tie-up, Ocado chief technology officer Paul Clarke said the retailer’s newest machinery is miles apart from its Hatfield and Dordon distribution centres.
“In the new warehouses, it’s completely different. Instead of all that conveyor, the way to visualise it is to imagine a chessboard,” Clarke says.
“The size of the two chessboard grids in Andover – formally referred to by Ocado as hives – are each the size of a football pitch”
“On that chessboardboard you’ve got rooks – in fact, they are robots – that can travel in the X direction or the Y direction.
“It’s like a three-dimensional cube, where the robots roam around on top of the chessboard and under every square of the board is a stack of totes [containing groceries], which they can pick up and move.
“The robots can bring the totes to machines situated at the side of the grid, which might be a picking station that allows a human, or in future a robot, to pick groceries out of the bin and place them into a customer order.
“Or a decant station that allows us to take goods coming in from suppliers, put them into bins, then put the bins away into the grid.”
Sound complicated? There’s more where that came from.
Factor into the equation that the size of the two chessboard grids in Andover – formally referred to by Ocado as hives – are each the size of a football pitch.
“Clarke likens the software to a ‘machine-learning-based air traffic control system’ ”
In its “big sister” Erith, where Morrisons will take space as part of its extended deal with Ocado, will have grids the size of three football pitches.
And consider the fact that the robots buzzing around atop those giant hives at four metres per second are “spoken to” 10 times every second by Ocado’s patented communication system.
Clarke likens the software to a “machine-learning-based air traffic control system” that choreographs the most efficient route for the robots to take, ensures they don’t collide with each other and optimises storage within the hive, working out the best spots to replace totes based on upcoming orders.
While Morrisons will take space in the Erith hives, Ocado’s new and currently unannounced European partner has opted, initially at least, to fulfil online orders from a manually operated warehouse.
Clarke insists the Ocado Smart Platform (OSP) is “a complete game-changer” but suggested, with accurate foresight when speaking to Retail Week prior to the unveiling of its maiden deal, that prospective partners would not necessarily need to go in all guns blazing by instantly building automated warehouses.
“The lovely thing about this solution is that you can build a warehouse, put in one or two of these grids, and start by only using a part of it”
Paul Clarke, Ocado
“Scalability is important,” Clarke explains. “It made sense for us to build the warehouse in Dordon – £230m [cost] for £1bn of sales capacity. That made sense in the UK because it is the most advanced online grocery market in the world.
“In other countries where online grocery is still getting off the ground, where we plan to sell OSP, that is a big spend all in one go. Those retailers need a way to grow into it.
“The lovely thing about this solution is that you can build a warehouse, put in one or two of these grids, and start by only using a part of it. As your sales grow, you just add more bins, more robots and possibly extend the grid.”
But will Clarke’s ambition to “pepper the planet” with such automated warehouses for Ocado’s OSP customers come to fruition or fail to deliver?
Retail experts who visited the Andover site this week admit they were impressed by the technology, but remain divided over whether Ocado can sign the “multiple” deals it desires.
JP Morgan analyst Borja Olcese believes the etailer is “a step ahead of its competition in terms of identifying efficiencies and automation capabilities,” calling Sunday’s deal announcement “a step in the right direction”.
He adds: “We believe the company is on track to further monetise its learning curve as it continues to improve the marginal economics of every new warehouse.”
“Clearly there is a strong software capability, but the question is how many deals can they achieve and at what scale?”
George Mensah, Shore Capital
Shore Capital analyst George Mensah agrees that the technology is “very advanced and very impressive on the eye”, but remains sceptical over Ocado’s long-term prospects.
“Clearly there is a strong software capability, but the question is how many deals can they achieve and at what scale,” he asks.
“They’ve got one over the line, which I guess serves as proof of concept externally, but that is just for one of the two fulfilment solutions Ocado provide.
“They do want to go down the line of providing a full fulfilment centre and leasing their products and services to retailers.”
Mensah believes the US may prove the most receptive market to Ocado’s automated warehouse proposition, given the recent rise of software providers like Instacart.
However, he believes the elephant in the room, Amazon, could pose a threat to its hopes of cracking America.
“Taking over the world would be a very, very long-haul opportunity. In the medium term, Ocado needs to prove that the economics of OSP are very sound”
George Mensah, Shore Capital
“There are other software providers and propositions that are coming to fruition in the US and I’d imagine Amazon would want to provide an alternative to OSP,” Mensah suggests.
“Without a doubt, that’s a real threat. Amazon don’t sit idly and they generally are at the cutting edge of data provision and distribution – and they have the scale to worry Ocado.
He adds: “So taking over the world would be a very, very long-haul opportunity. In the medium term, Ocado needs to prove that the economics of OSP are very sound and can deliver returns.
“Until that comes to fruition, we won’t see the strength of roll-out that Ocado probably wants.”
Ocado may be redefining fulfilment in the UK, but after 15 tough years in its domestic market, it may face a similar slog to secure the multiple partners it craves.