Ocado rubber-stamped an agreement with South Korean giant Lotte Shopping on Tuesday. The move has been hailed by investors as a coup, given South Korea’s highly mature ecommerce market and high level of automation. Could this be 12th time lucky for Ocado?

Lotte Mart, South Korea

Ocado will integrate its in-store fulfilment solution into Lotte’s 1,000-strong store estate by 2024

After a gap of nearly nine months, Ocado Solutions has unveiled its 12th tie-up, this time with South Korean retail conglomerate Lotte Shopping, to develop its online grocery business. 

Ocado and Lotte will develop six automated customer fulfilment centres (CFCs) in the country by 2028, as well as rolling out Ocado’s in-store fulfilment solution across the Korean giant’s 1,000-strong store estate by 2024.

Ocado Group chief executive Tim Steiner hails the agreement and said South Korea represented “a very significant market for us to move into”. 

While Lotte Shopping may be number two in South Korean grocery behind rival Shinsegae, which owns Emart, with £9.5bn of revenues annually, the wider group spans retail, food production, hotels and chemicals, and generates annual revenues in excess of £45bn.

A fresh challenge

Bernstein analyst William Wood says the partnership is significant for Ocado because South Korea is one of the most mature ecommerce markets. 

“Ocado has gone and got a deal in arguably the most advanced ecommerce market in the world, and with a partner that has already tested multiple different types of automation and has now signed up to the full Ocado Solutions,” he says. 

“You can only take this as a huge positive. South Korea is very advanced in terms of machinery, computing software and in terms of ecommerce more generally.”

“South Korea is more like the American customer model – predominantly ambient groceries ordered and delivered to your door. Not the full basket, necessarily”

William Wood, Bernstein

Despite that, Woods says online grocery lags behind the wider market in general, particularly in fresh products. Online rivals such as South Korea’s largest marketplace Coupang focus more on ambient groceries and more rapid delivery times, which leaves space for Lotte and Ocado. 

South Korea is unlike the UK, where we tend to do a lot of fresh grocery, big basket shopping online,” he says. “It’s more like the American customer model – predominantly ambient groceries ordered and delivered through things like Coupang to your door for pet food and cleaning equipment. Not the full basket, necessarily.”

That is backed up by data from Statista, which found 18% of South Korean households reported purchasing groceries online at least once a month in 2021, compared to around 30% who had bought other items online across categories. 

Lotte Group clearly sees the opportunity to overtake the more convenience-focused offer from Coupang.

“We will build a combined sourcing system for grocery stores, convenience stores, and more, which makes Lotte the first grocery platform that will combine off- and online shopping,” a Lotte spokesperson told The Korea Economic Daily

Why Ocado?

Lotte Shopping has experimented with its own automated solutions in the past. So, why is it turning to Ocado?

IGD Global Insight Lead Laura Jacobson raises the wider point that Lotte Group missed out on acquiring eBay Korea to Shinsegae, which she says was “likely the catalyst for its partnership with Ocado as it seeks to even the playing field in a mature, but growing and highly competitive, ecommerce market”.

Steiner points to the suite of features Ocado unveiled as part of its Re:Imagined announcement in January as another reason for winning Lotte’s business. 

Ocado Warehouse Andover

Ocado’s ability to provide an in-store picking solution for Lotte Shopping’s 1,000 stores was a winning factor

In particular, he raises the possibility of creating multi-story CFCs for Lotte. “This innovation in site design is enabled by some of the technological developments that we revealed [earlier in the year], which will facilitate lighter grids and more flexible building structures for CFCs. This will allow us to make more efficient use of space in densely-built environments, and it’s something that we expect to do over the next few years”. 

Ocado’s ability to provide an in-store picking solution for Lotte Shopping’s 1,000 stores, and a focus on hiring its own delivery drivers rather than focus on third-party providers were all also winning factors.

Such focus on research and development won over Lotte Shopping boss Kim Sang-hyun. “This partnership with Ocado, one of the most innovative companies worldwide will be a great opportunity for Lotte Shopping to provide our customers with a new online grocery shopping experience,” he says.

“Also I expect this will be the first step for us on the way not only to increasing our competitiveness and presence in the e-grocery market, but also to achieving the leading position in the overall grocery market in Korea.”

The grocery market could just be the beginning for Lotte and Ocado. Lotte Shopping also has a network of department stores which offer customers fashion and high-end luxury items.

Steiner has spoken openly in the past about expanding Ocado’s tech to fulfil orders in other categories. While he says there are no plans to go beyond food with Lotte Shopping, he does not rule out the possibility of expanding the partnership in future.

“As we extend our businesses outside of grocery, and if there are opportunities with our partners, they are candidates to do other work with,” he says.

Where next?

Ocado Group robot

South Korea is very advanced in terms of machinery, computing software and ecommerce

The deal is a win for Ocado Solutions after nine months without any tie-ups. South Korea is also a significantly bigger market than Poland and Spain, where Ocado last won international partners. 

Following its deal with Lotte, Ocado now has partners in seven of the world’s top 10 online grocery markets – the exceptions being China, Germany and the Netherlands.

With partners now in both Japan and South Korea, might Ocado Solutions be eyeing a future tilt for one of the biggest ecommerce markets in not just Asia, but the world, in China? Bernstein’s Wood does not think so. 

“I don’t think they’re looking at China, because of intellectual property protection. That’s a big risk for them,” he says.

With the German market dominated by the discounters and the Netherlands in a duopoly between Alholde Delhaize and Jumbo, Woods thinks Ocado may instead turn attention to Italy, Chile or even smaller markets such as Hong Kong, Singapore or Israel. 

Wherever Ocado Solutions turns next, Hargreaves Lansdown equity analyst Matt Britzman says investors will be pleased “to hear no additional capital raises are on the cards, with the capex spend having already been modelled into Ocado’s plans”.

Shares in Ocado soared 36% on Tuesday off the back of the news.

While cynics could say it is just another instance of Ocado promising big for the future while failing to deliver for the present, the scope of the opportunity and the vote of confidence in the technology represents a big step forward.

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