Ocado: An Alternative Way to Bridge the Last Mile in Grocery Home Delivery?1
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Ocado:
An Alternative Way to Bridge the
Last Mile in Grocery Home Delivery?1
During the U.S. internet frenzy of 1998-2000, numerous new, pure play Internet grocers
promised consumers that they could have groceries at prices equal to or lower than existing
bricks-and-mortar grocery stores, while simultaneously enjoying unparalleled convenience
without having to leave the house and battle the crowds at the stores themselves. The most
prominent of these companies was Webvan, which reached a stock market value of $7.9 billion
at the end of its IPO. Webvan, Home Grocer, PeaPod and several other Internet grocers made
huge bets that selling groceries online was a growth market and represented a new way of doing
business. Unfortunately, as has been illustrated by the widely publicized collapses of these high
profile Internet grocers, there was a substantial gap between theory and practical application.
What the grocers discovered was that covering the “last mile” to consumers’ homes to deliver
groceries to their doorstep represented a substantial challenge with numerous operational and
logistical difficulties.
In contrast, there are currently several examples of grocery and other food delivery companies
that appear to be making effective use of the Internet as a link with customers. In particular, both
Tesco in Britain and Albertson’s in the U.S. currently have Internet channels for selling groceries
that are profitablei. Whereas many of the failed Internet grocers appeared to be hoping to capture
a large portion of the overall grocery market, companies such as Tesco and Albertson’s view
Internet ordering of groceries more as an additional sales channel. This channel is unlikely to
ever represent a majority of grocer sales, but even a small portion of sales can be quite
significant due to the huge size of the overall market.
Are these new forays into the Internet likely to fare better than their earlier counterparts?
Ultimately, only time will tell as to the degree of profitability attained, but it is possible to create
useful comparisons between selected examples of the old (Webvan) and new attempts (Ocado,
Sainsbury’s and Tesco in particular).
1
Copyright 2002 – Michigan State University. This case was prepared from published sources
and personal interviews with Ocado and Sainsbury’s executives by Dr. Ken Boyer (Michigan
State University) and Dr. Mark Frohlich (London Business Scool) as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a business situation.
Software for solving the delivery routing problem written by Alex Rodrigues. This case has
been published as case #602-057-1 by the European Case Clearing House.
1The Grocery Industry
The U.S.
Groceries and other food retailers operate in one of the more mundane, yet fundamental and
pervasive industry segments in the world. Everyone eats, thus everyone must purchase food
from some retail outlet. Consequently, the grocery industry is a huge, fragmented and
enormously competitive environment. Annual sales in the U.S. are $434.7 billionii, yet the
competition for these sales dollars is intense, with the top 10 supermarket chains holding less
than 50% of the market shareiii. The intense competition is often described as leaving
supermarkets to operate on razor thin margins that average 1-2 percent of sales. Exhibit 1
provides an overview of the top ten supermarket chains in the U.S. and the top 8 in the U.K.
While groceries are perhaps the most universal commodity, this competition often spurs
supermarkets to go to great lengths to develop new technologies and methods of streamlining
both their supply chain and their marketing efforts. For example, supermarkets are associated
with the first application of bar coding and UPC coding for inventory and transaction purposes.
The first application of this technology was at the Marsh Supermarket in Troy, Ohio on June 26,
1974. In the intervening years, it is estimated that prices would have risen twice as fast without
the use of the UPC symbol and that the application of this technology has been 20 times more
valuable than its creators originally projected. Today there are over 5 billion scans per day with
the UPC codeiv. An extension of bar coding technology utilizes direct product profitability
(DPP) to track scanning data by brand, category etc. to gather information on coupon use, the
effects of promotion and shelf displays. The use of DPP has led to greater integration and
coordination between market research and salesv. More recently, there has been a great deal of
interest in the use of the Internet as a technological tool to improve the entire grocery supply
chain. In theory, the Internet can be used to link customers with grocery stores from their homes
and will help integrate the supply chain by closely linking marketing, sales, operations and
logistics.
United Kingdom
In comparison to the U.S., the grocery market in the U.K. is both smaller and more
homogeneous. The total size of the market is around ₤80 billion ($120 billion), of which the top
three retailers (Tesco, Sainsbury’s and Asda) account for more than half of the sales (58%). Not
only are there fewer grocers fighting over the pie, but also the stores in the U.K. tend to be much
busier than in the U.S. For example, the average $/sq. foot ratio for the top 10 U.S. grocers is
$450.29/ sq. ft., while the sales per square foot for Tesco is $1,595.74/sq. ft. and Sainsbury’s is
$1,554.12/sq. ft. This means that both grocers sell 3 times as much in the same amount of space
as American grocers. The busyness of U.K. grocery stores is legendary and is well described by
the term “trolley rage” – i.e. customers that are frustrated and stymied by the crowded markets.
The combination of a homogenous market, in which it is hard to gain ground on competitors, and
a network of stores that is much more heavily utilized, makes home delivery of groceries in the
U.K. substantially more attractive than in the U.S. Grocers such as Sainsbury’s and Asda look at
home delivery as a potential channel for making inroads on Tesco’s market leadership, while
regional grocers like Waitrose (whose market is concentrated in SE England) view home
2delivery as an opportunity to expand across the U.K., thus Waitrose is partnered with Ocado. A
final factor that makes home delivery more attractive in the U.K. relative to the U.S. is the
greater density of people, particularly in the expensive, heavily populated greater London region.
Home Delivery
Home delivery of groceries is both an attractive concept for harried, busy consumers who dislike
their weekly shopping duties and an amazingly complex challenge for businesses to achieve at a
reasonable cost. The ideal target customer for this service is a person who leads an extremely
busy and hectic life, dreads visiting busy grocery stores (where they often are jostling with
fellow busy people who also can’t get to the store any other time) and has a fairly high income.
While the group of customers that fit this profile will never be a majority of the market, it has
been estimated that there is a market of between ₤3 billion and ₤9 billion (5 – 15% of the total
market) in the U.K. and between $5 billion and $25 billion (1% - 5% of the total market) in the
U.S. Grocery stores are increasingly looking at home delivery as an alternative channel to grow
their business and capture or divert business from other grocers in a cutthroat industry.
While there may be a substantial market for home delivery, providing this service in volume at
“reasonable” prices presents a substantial challenge. In particular, there are three substantial
hurdles:
1. Grocers must pick the individual orders for customers – thus increasing costs
substantially over existing supermarkets where customers select their own orders.
2. Grocers must either deliver the goods to the consumer’s home (i.e. conquer the last mile)
or hold the orders for customer pick-up – both of which involve a substantial increase in
both costs and operational complexity.
3. While hurdles 1 and 2 can be surmounted, the third hurdle lies in convincing consumers
that this service is worth the additional price of delivery (Tesco, Sainsbury’s,
Albertson’s). In Ocado’s case, orders over ₤75 have no delivery fee, so the hurdle in this
case is whether this service can be provided in a profitable manner. If it can save
consumers time (as yet an uncertain proposition because of the need for customers to
“learn” how to manage placing Internet orders), then they may be willing to pay a
premium for this service. If not, then the existing model of customers serving themselves
at supermarkets will remain substantially the same.
This case provides an overview of several grocers which are tackling these challenges head-on
and provides some information for the reader to develop their own prediction regarding the
future of grocery home delivery.
The Current State of Grocery Home Delivery
Tesco
Britain’s top supermarket chain has annual sales of ₤20 billion ($30 billion) in 690 British stores.
While Tesco initially was criticized for its go-slow approach to selling groceries over the
Internet, it has become the world’s largest online grocer and now sells through 250 outlets and
had revenues from home deliveries of ₤356 million ($520 million)vi in the year ending February
328, 2002. Most importantly, Tesco has managed to develop an operational model that is
profitable, with a net operating margin of 5% on approximately 4 million orders per year. All of
this has been achieved with a relatively small investment of $59 million. Tesco has kept the
operations of home delivery simple by using existing assets rather than building high-tech
warehouses. Online orders are filled by Tesco employees at the nearest Tesco store, then picked
up and delivered via van. This approach works well for lower volumes of business, albeit at an
increased cost per order or customer relative to existing sales where customers pick the groceries
themselves and there is no need for delivery.
Sainsbury’s
Sainsbury’s is the second largest supermarket chain in the U.K., with annual sales of ₤14.9
billion ($22.3 billion) in 463 stores. During the year ended March 31, 2002, Sainsbury’s had
online sales of ₤110 million ($165 million) through its online ordering service (Sainsbury’s To
You). This service was available through 53 stores, covers 71 percent of UK households and
averages 27,000 orders per weekvii. While the volume of online business has been growing
steadily, profitability is still elusive, with losses of ₤50 million ($75 million) for the year ending
March 31, 2002.
Sainsbury’s hopes to use online ordering to complement a series of business initiatives intended
to help it overtake Tesco for market leadership in the U.K. – a position which Tesco has
occupied since the early 1990s. The business model is very similar to Tesco’s with one notable
exception. Most orders are picked from local stores, but in central London Sainsbury’s employs
a semi-automated picking center at Park Royal. According to Robin Lasseter, Head of Online,
“We believe that a central picking center can provide better quality and fewer substitutions for
our customers in the central London area. These customers are very selective and expect a
higher level of service.”
Albertson’s
Albertson’s is the second largest supermarket chain in the U.S.viii, with 2,500 stores, 220,000
employees and $37.5 billion in annual salesix. More importantly for the purposes of the current
study, Albertson’s is one of the few remaining American supermarket chains to still be offering
Internet ordering of groceriesx. Similar to Tesco, they have pursued a dramatically different
operations strategy than many of the failed online grocers. Rather than build a separate
infrastructure for filling customer orders, Albertson’s employs “e-shoppers” to stock customer
orders through existing stores, or as Matt Muta, V.P. of Web Technologies states “we use
existing store infrastructure and IT systems of existing stores, so we’re not adding a lot of
additional cost”. Albertson’s initially offered consumers only the option of picking their orders
up when they first offered online shopping at seven Seattle area stores 2 ½ years ago. Having
achieved some success with this focused strategy, Albertson’s expanded its delivery options in
October, 2001 when it offered pick-up service at 38 San Diego area stores or home delivery to
consumers within a 6-8 mile radius of these stores. Albertson’s marketing strategy has also been
tailored to match with its operations strategy – rather than providing free delivery, a $9.95 fee is
charged for delivery and a $5.95 fee is charged for store pick-up. Thus, initial efforts to develop
Internet-ordering have resulted in an increase in per store revenues – while Albertson’s will not
4release public figures, a conservative estimate is that revenues associated with online orders are
around $250 million.
MyWebGrocer
In contrast to the other companies described in this case, MyWebGrocer does not handle any
grocery items in any way. Instead, they provide software, hardware and technical support for
single grocery stores or small chains that do not have the resources or inclination to develop their
own proprietary online ordering system. MyWebGrocer has developed an online system that is
largely standardized, but which also allows a degree of customization for individual stores. All
software development, maintenance, support and hosting occurs at MyWebGrocer, which
charges $4 per customer order (i.e. Jane Smith ordering from Lowe’s foods through
MyWebGrocer). This order is then transmitted to the local store, where employees pick the
order using a handheld picking device. Individual stores are then responsible for developing
their own delivery or pickup systems, with guidance provided by MyWebGrocer.
Approximately 130 stores and 26 customers (a chain grocery is one customer but may have
multiple stores) utilize this service, including D’Agostino (new York City), Lowe’s (north
Carolina), Rice Epicurean Markets (Houston) and Santoni’s Market (Baltimore). According to
Bob Clare, owner of Shoprite of Oakland, NJ, another MyWebGrocer client:
“Full service grocers simply have to look at the online channel as a way of providing the
ultimate in convenience for an increasingly impatient consumer”.xi
Ocado
What is Ocado?
Ocado was formed by three ex-Goldman Sachs directors (Jonathan Faiman, Jason Gissing and
Tim Steiner) in early 2000 and was originally named Last Mile Solutions. Financed by a ₤46
million investment and 40% ownership stake by Waitrose, Ocado has taken a deliberate and
carefully planned approach to developing its business, under co-Managing Directors Nigel
Robertson and Roger Whiteside and Logistics Director Robert Gorrie. This approach is in stark
contrast with the shoot for the stars approach taken by many of the failed Internet grocers such as
Webvan and Home Grocer. Ocado, renamed from Last Mile Solutions in late 2001, spent the
better part of 2 years developing and planning all aspects of its business with a core group of 15
– 20 employees. This planning phase was followed by a phased rollout of service, starting north
of London and working down toward central London between March and July of 2002. This
approach is based on recognition that the idea of mass-market home delivery requires new
techniques on the part of both companies and customers. Nigel Robertson states “It makes sense
to learn all the problems in the early days, before we commit advanced resources to the
operation. And believe me, there will be a learning process to go through. We don’t have any
doubt of that”xii. Equally important to the long-term success is the understanding that customers
need to be nurtured and guided to learn a new (and hopefully easier) way of shopping for
groceries, or as Nigel Robertson states:
“We are working to change the habits of a lifetime”
5About 20 miles north of central London, in the town of Hatfield, Hertfordshire, England a
300,000 square foot distribution center is in its first year of operation. This distribution center is
the center of Ocado’s operations – built to handle orders placed over the Internet for home
delivery to customers in the London metropolitan area. The ultimate capacity of the distribution
center is equivalent to the sales volume of approximately 20 stores.
Marketing Challenges
When building a business from scratch and seeking to achieve rapid growth it is critical to get a
marketing campaign that rapidly builds brand awareness. Katie Spriggs, Head of Marketing,
realizes that there is great pressure on her to launch the business and attract customers to both a
new name and a new way of buying groceries. The marketing effort faces two key, yet
conflicting challenges. First, it is essential to grow the market very quickly in order to fill up the
Hatfield distribution center. One of the key elements of Webvan’s failure was its inability to
attract sufficient orders to utilize its distribution centersxiii. Similarly, Ocado is under substantial
pressure to fill its Hatfield facility (designed to handle the equivalent business of 20
supermarkets) with orders since the break-even point for such a facility is at least 70%
utilization. Katie succinctly summarizes the need to generate orders in saying:
“my job is to feed the beast – to get the customers”.
The second key marketing challenge is in many ways in conflict with filling the distribution
center. While it is important to generate orders, it is also critical to generate orders that fit
together in some type of densely concentrated pattern in order to facilitate delivery. For
example, four customers that live 5 miles from each other are much less valuable than four
customers that live within a 1-mile radius. In short, the ideal goal is to attract customers in
closely packed areas. In theory this is possible, but in practice there are numerous complicating
factors – including variations in daily ordering patterns, travel times and order sizes. For
example, if you and your next door neighbor both order that would make delivering to both of
you fairly efficient UNLESS your orders are for different days, or even for the same day but
different times.
One of Webvan’s major failings involved a failure to balance these competing objectives of fast
growth with dense growth. In the rush to build market share, Webvan was fairly indiscriminate
in its marketing campaign in terms of advertising service using mass media to market to a wide
area of customers. In contrast, Ocado seeks to rollout its service by focusing tightly on fairly
dense geographic areas and by developing a high route density within each area.
Simultaneously, Ocado has tightly profiled its “sweet spot” customers: according to Katie these
customers “are primarily female, with both spouses working and with one or more children
under 15 at home. A big selling point to these customers is to avoid ‘trolley rage’ from having to
shop in crowded stores at late hours.” Ocado is selling more than just groceries, it is selling a
personal relationship that saves time for its time-starved customers.
“We find that a 1 hour delivery slot is very important to our customers and offers a
substantial improvement over the 2 hour slots offered by our competitors. Of this group of
‘sweet spot’ customers 25% have tried home delivery of groceries, but only 7% are still using
6the service with our competitors. We intend to offer both timely and reliable service that will
create loyal, repeat customers.” – Katie Spriggs
Katie Spriggs and Ocado’s marketing staff operate on two fundamental principles that seek to
balance the two objectives:
A. Launch and Learn – not Spray and Pray.
B. Farm an Area, not Slash and Burn.
Rather than employing mass media techniques such as television, radio and newspaper/magazine
advertising, Ocado concentrates on direct marketing to a focused area. In order to build initial
customer awareness, Ocado developed a four step-marketing plan:
1. Every customer in the phased roll-out areas was sent an introductory letter. This letter
described the Ocado business model, emphasized the partnership with Waitrose and
provided an initial introduction to the website for ordering.
2. Potential customers were sent an introductory packet including an Ocado branded coffee
packet – along with an invitation to “sit and have a cup of coffee with Ocado”. The idea
was to introduce Ocado as a relaxed, value-added business that would help free up
customers’ time.
3. The third mailout was a follow-on packet with an offer of ₤10 off each of a customer’s
first five orders. This packet also contained an Ocado apron.
4. The 2nd Follow-on packet was sent several weeks after the apron packet. This packet
served as a reminder to customers and included an Ocado oven mitt.
Another important component of the marketing campaign is backfilling, which involves targeting
specific areas that have already been direct marketed and seeking to increase route density. This
is done through follow-up direct mailings, passing out fliers and advertising at train stations and
by using available customer service team members (CSTMs that deliver customer orders). In the
early stages of rollout, the CSTMs are likely to have routes that include a lot of downtime in
which no deliveries are scheduled (this is necessary to ensure that deliveries during peak periods
are met). Rather than having CSTMs return to the central DC or simply wait around for the next
delivery, Ocado uses the CSTMs to approach potential customers on a door-to-door basis in
areas where there are a high proportion of sweet spot customers. The CSTMs are trained to
introduce themselves and the Ocado service, leave a brochure and generally provide a
personalization of the service.
Order Picking Challenges
One of the major obstacles to making home delivery of groceries profitable is the transfer of item
selection/picking from consumer to provider. For decades, the prevailing supermarket model has
been one in which the shelves of the store are stocked with a variety of items and the consumer is
then permitted to browse the store and select their own groceries. This application of “self-
sourcing” first appeared at a Kroger store in 1916 in Cincinnati, Ohio and quickly resulted in a
fundamental change from the previous format where customers came to a store, told a clerk
behind the counter which items they wanted and the clerk picked, packaged and sold those items.
The predominant model in the U.S. and U.K., as well as most of the developed world, is one
where store employees stock the shelves (usually at night or in off-peak hours) and customers
7walk the aisles while pushing a grocery cart/trolley and select the items they desire. When
finished, customers proceed to the checkout line where a clerk scans their items, processes
payment and bags the groceries (sometimes). For the most part, customers accept this
arrangement and the grocery stores look for ways to encourage consumers to do even more of the
work – such as self-bagging of groceries or even self-checkout at automated express lines.
So, the obvious question is – “Why would stores try to reverse this trend and take more
work back into their hands”?
It is commonly accepted in the grocery business that many customers look forward to grocery
shopping as if they were going to the dentist to have a tooth pulled. Shopping involves battling
with traffic to drive to the store (or riding the bus or subway), finding a parking spot, battling
with other customers (often while pulling along or avoiding a pair of noisy, quarreling children
under five), then battling traffic to return home, all while carrying, picking and bagging our own
groceries. All of which can be succinctly summarized in the words of Shawn Sell: “What a ho-
hum waste of time”xiv. Yet, we all have to eat, so we persevere.
One answer to the above question is that there is a group of people such as Shawn Sell that is
willing to pay a premium to have their groceries picked and delivered to their house. Consider
the estimate of 2 hours and 40 minutes for one trip to the grocery store for Shawn Sellxv, if the
same order could be placed online in twenty minutes, then delivered to home, how would you
value the 2 hours and twenty minutes saved? What is the value of this market if it represents 1 –
5% of the U.S. grocery market ($450 billion total) or 5 – 15% of the U.K. market ($120 billion
total)?
The second answer to the above question is actually a component of the first. In theory,
“professional” shoppers should be able to pick grocery items more efficiently than the average
consumer for a number of reasons, including repeatability (if a person spends 40 hours a week
picking groceries they will get much better much faster than the average once a week shopper),
route planning (software can be used to develop an efficient route through the store) and
specialization (one worker picks only a subset of grocery items). In order to examine the
proposition that “professional” shoppers are more efficient, let us briefly compare two
approaches to picking groceries:
(1) Store-based picking (utilized by Albertson’s, Tesco, Safeway, Sainsbury’s and grocery
clients of MyWebGrocer): Stores hire employees to take individual orders and walk
through the store picking groceries to order. This is potentially more efficient than
consumer shopping because of repeatability, route planning and the ability of employees
to work during non-peak hours – thus less traffic. However there are numerous
disadvantages, including congestion (in practice it is not possible to pick more than 1 or 2
orders at a time because of crowded stores –particularly in the U.K.; in fact, many store
shoppers in Britain are upset when the stores’ Internet shoppers get in their way),
variation in skill levels and assignments, and a large amount of product handling.
(2) Distribution Center-based picking (utilized by Ahold, Sainsbury’s, Ocado and Webvan):
groceries are picked from a central DC which has numerous advantages: removes a link
in the supply chain (only if pure DC approach – as used by Ocado – see Exhibit 3) which
8can reduce costs and get fresh items (produce) to consumer more quickly, aggregates
inventory to save money and provide higher service level (hence fewer substitutions), and
allows workers to specialize by picking a smaller variety of items and not walking long
distances between items. However there are also numerous disadvantages, including:
high fixed cost of investment, longer travel times to customer homes, coordination
challenges in processing a large number of orders through multiple stations and workers.
Numerous existing grocers have proven that store-based picking can work, but at a cost. At
Tesco, pickers are assigned to one of six zones, where they pick orders for up to six customers at
a time using a touch-pad computer that plans efficient routes through the store and scans each
item to check that it is the right one. Orders are then assembled in the back of the store for
delivery. Tesco claims that the average 64-item order can be filled in 32 minutes, or 30 seconds
per item, at a cost of about $8.50 per order, including labor and depreciationxvi. This estimate is
remarkably close to the estimate provided by Mike Spindler, president of MyWebGrocer, of
$7.80 per orderxvii. Thus, store-based picking works, but with a few significant downsides:
(1) While “more efficient” than customer picking it still represents a substantial increase in
costs that the customer must be willing to pay for.
(2) In crowded stores the addition of employees picking for home delivery will exacerbate an
existing problem.
(3) Customers must be willing to accept that they can’t handle fruit, produce and other
perishable items and pick according to their personal criteria. Furthermore, the problem
of what to do when an item is out of stock is an ever-present difficulty. When a
consumer sees that something is out of stock (not an uncommon event given that 5 – 8%
of items may be out of stock at any given time in an average supermarket) he or she
intuitively makes a decision to either buy a different product, a different size or forgo the
product altogether. There is no way that home delivery grocers can perfectly deal with
substitutes, other than making sure there are none – something that is unlikely to ever
happen.
DC-based picking on the other hand has a fairly miserable record. Webvan claimed that workers
would be able to pick 450 items per hour or 20 times the productivity of a store shopperxviii. This
productivity was based on the ability for workers to pick groceries in large batches without
having to waste time and effort traveling between locations. Each worker was going to pick
groceries using an automated carousel and then place groceries in a tote that would be
automatically routed through the DC by a system of conveyors. While exact data on the
productivity Webvan achieved is sparse, several things are clear from the failure of this
approach. First, Webvan did not get anywhere near this level of productivity. Second, dedicated
facilities of this type are very expensive and typically only feasible when highly utilized.
Unfortunately for Webvan, none of their DCs ever approached this level of utilization. Third,
picking groceries is a very complex task, partly because of the need to keep things at the proper
temperature (there are three basic groups: frozen, chilled and ambient). More recently, Asda
announced in December, 2001 that it was abandoning its use of dedicated picking centers at
Croydon and Watford and transferring picking to 13 of its retail stores in South East Britain.
So why does Ocado think that it can do better than Webvan and Asda? First, as shown in Exhibit
3, a purpose built facility with no stores to support effectively (at least in theory) removes a link
9in the supply chain. If Ocado can make the DC-based picking approach work, then it can
remove the costs of running stores, which typically run 20-25% of sales. These cost savings can
be used to offset the costs of picking and delivering the orders. Second, Ocado believes that it
has learned valuable lessons from the efforts of its predecessors. In particular, Nigel Robertson
states “Our Hatfield facility is built on a larger scale [to approximate the size of a typical DC that
supplies about 20 stores]. So it’s much easier for us to deal with ‘peakiness’ and maintain
availability. Also we’re completely focused on home deliveries – they’re not an add-on to a
retail operation [as with Asda]”xix.
In particular, there are three major differences between Ocado’s approach and that used by
predecessors. First, Ocado is taking time to allow learning to take place. The first picking
operation was a largely manual process setup in a warehouse in Hemel Hempstead. This allowed
Ocado to learn and refine its processes before committing to a more automated approach at its
Hatfield purpose-built facility. In addition, Ocado is rolling out this new and yet to be proven
approach at a single facility, while Webvan ignored time-tested principles by trying to do
something new not in one or two places, but in 8 or more at a time. As everyone at Ocado
readily admits – “this is a new business, we try our best to get a good answer, but we are under
no illusions that everything will work perfectly out of the box – so we are always ready to adapt
and revise”. Second, Ocado has designed the Hatfield facility so that it can be opened up in three
phases:
1. Phase 1 involves constructing the entire footprint of the facility (all walls and roofing),
but only 2 out 3 bays of the facility are finished (i.e. concrete flowing poured and all
utilities hooked up. During phase I, all orders will be picked using an automated trolley
system running through bay 1 (which has all of the refrigeration equipment necessary)
and outgoing orders will be packed in bay 2 and inbound orders received.
2. Phase 2 involves finishing out bay 3 (i.e. pouring flooring and installing utilities etc.).
Then packing is moved to bay 3 and orders will delivered via a trolley on the outside of
bay 2. Then, bay 2 will be installed with the automated cranes and trolley system
necessary to operate at higher volumes.
3. When sufficient volume is reached (approximately 10,000 orders on peak days), the final
layout will consist of picking refrigerated and frozen orders in bay 1, picking of ambient
orders in bay 2, and packing of outgoing orders and receiving of inbound orders in bay 3.
The ultimate capacity of the Hatfield facility will be 20,000 orders on a peak day (the authors
estimate that Ocado’s goal is to achieve picking rates of above 200 items/employee per hour).
According to Robert Gorrie, Logistics Director, “This phased approach reduces our initial
investment in Phase 1 by 40%, primarily through the savings in not having to buy all of the
equipment for the final state immediately. In the long run, it costs a bit more, but it conserves
resources in the short run while we are building the business.”
Order Delivery Challenges
Delivering groceries to customers’ homes is a challenge not faced by traditional grocery stores.
This is an expensive and difficult prospect since there are numerous government regulations for
the temperature and delivery conditions of refrigerated and frozen food. The Head of Customer
10Service for Ocado is Andy McWilliams, who is in charge of all aspects of home delivery once
the order has been packed at the Hatfield DC. According to Andy, “We view home delivery as a
not just a necessary element of our business, but one of the key ways we can amaze customers.
Our goal is to build a customer centric network and focus on building relationships with
customers. Ocado wants to build a reputation for friendly service that contrasts with the
traditional British image of ‘a man in a white van’ delivery which has only 60% reliability and a
distinct reputation for rudeness.”
In order to foster a customer centric approach, customer service team members are given a 2
week training session that familiarizes them with all aspects of Ocado’s business, including the
website, order fulfillment/picking and delivery. Then each new customer service representative
rides with a veteran CSTM as an apprentice for a week. Every shift has a 20 minute briefing at
the beginning of the shift where they are reminded of key things for the day – such as special
promotions, not to leave refrigeration compartment door open on hot days and the status of
company orders and expansion plans. These briefings are often given by one of the managing
directors, either Nigel Robertson or Roger Whiteside. Ocado is trying to build an open corporate
culture where employees are encouraged to do what is necessary, even if the given task falls
outside their normal job description. The goal is to develop a corporate culture similar to the one
at Southwest Airlines, thus many of the same employee relationship building techniques are
employed.
A huge challenge is presented when developing daily routes. Unlike an organization like the
post office or a newspaper, the orders for home delivery of groceries vary substantially on a daily
basis. The goal is to average about 15 deliveries per route, but there is a trade-off: more
deliveries per route is more efficient and less costly to Ocado, but this also brings a higher risk of
“missing” a delivery window – either by being too late or too early. Scheduling is also
complicated by spikes in demand – in general, Friday is the busiest day with about 25% of the
orders for the week. There is also a great deal of variation within a day – on weekdays 40% of
the orders are for mornings while 60% are for afternoons, but on Saturday this pattern is reversed
with 70% of the orders in the morning and 30% in the afternoon.
A three-step procedure is used to develop routes:
1. A forecast is made of the number of deliveries for each day (for example, a Thursday
might have 3,900 deliveries scheduled).
2. This forecast is divided by the number of drops/route (i.e. 15 drops/route, or if a
greater cushion or safety factor is used, this number might be lower).
3. The number resulting from step 2 represents the number of routes to be developed (in
this case 3,900/15 = 260 routes). This number is given to a software program named
Descartes which then utilizes the customer order information (delivery slot and
location) along with routing information (i.e. maps of the area and estimated travel
times between locations) to develop that many routes. Descartes has travel speeds
assigned for every major street/route (these times are modified to provide a cushion –
i.e. a route with an average speed of 18 miles an hour may be entered with a speed of
17 miles per hour) and a drop time (i.e. the time to park, unload the van, walk to
11customer’s door, unload groceries and return) which can also be modified to include a
cushion.
During the early stages of Ocado’s growth, they have been averaging substantially below their
goal of 15 deliveries per route as they seek to grow their market. Thus, initial costs are quite
high but they have been delivering close to 100% of their orders on time. In addition, Ocado’s
goal is to average less than 2% returns (either because of a damaged product or a substitution for
an out of stock product.). As their sales and order volume increases, both of these metrics will
be challenged, but delivery costs should decrease as they get closer to 15 deliveries per route.
When a customer has a complaint regarding service or damaged goods, a tool called “Andy’s
Toybox” is employed in which each CSTM is given a selection of items such as wine, crackers,
cookies etc. to give to customers to maintain or build goodwill. Andy’s Toybox also typically
holds some inexpensive toys or candy to be given to children.
Delivery Scheduling Exercise
Exhibit 5 provides an illustration of the challenges involved in developing routes to meet pre-
scheduled delivery windows while also trying to keep costs down. The table lists 45 imaginary
customers of a home delivery grocer, their locations (using X,Y coordinates which can be
thought of as distances East-West and North-South of either a distribution center or a store) and
the delivery window that customers have booked.
Try to develop a delivery route which minimizes the number of delivery trucks needed (and to a
lesser extent the distances traveled) for two situations: (1) assuming that there are no delivery
windows – i.e. customers will take a delivery anytime from 9:00 AM – 5:00 PM, and (2) using
the windows shown in Exhibit 5. Assume that this represents a single day of deliveries, that all
customers must be served within their windows, that all trucks must complete their route and
return to the DC by 5:00 PM. Note, the routes can operate between 9:00 AM and 5:00 PM,
drivers are briefed on their routes from 8:30 – 9:00 AM and checked in on return at 5:00 PM.
12Exhibit 1. Largest Supermarket Chains in America and Britain
2000
# Stores Supermarket No. of
(> $2 million Sales Square Feet Checkouts FTE
in sales) ($ millions) (Thousands) or Registers Employees
United States
1) Kroger 2,366 43,120 100,653 26,581 220,925
Cincinnati, OH
2) Albertson’s* 1,715 31,461 67,048 17,228 139,537
Boise, ID
3) Safeway* 1,482 28,829 51,854 14,025 111,103
Pleasanton, CA
4) Wal-Mart 908 22,947 54,735 25,309 237,786
Bentonville, AK
5) Ahold USA* 874 20,022 39,769 12,389 90,293
Chantilly, VA
6) Delhaize America 1,435 15,042 39,346 12,044 67,103
Salisbury, NC
7) Winn-Dixie 1,081 13,731 40,174 11,490 87,136
Jacksonville, FL
8) Publix 645 13,021 25,382 7,213 65,926
Lakeland, FL
9) Great A& P Tea 553 8,075 16,492 6,107 44,888
Montvale, NJ
10) Supervalu 539 7,197 16,357 5,240 35,920
Eden Prairie, MN
TOTAL 11,598 203,445 451,810 137,626 1,100,617
Sales Market
($ billions) Share
United Kingdom
*
Tesco 30.0 25.3%
Sainsbury’s* 22.3 17.5%
Asda* 18.8 15.3%
Safeway* 12.9 10.5%
Morrisons 7.0 5.7%
Waitrose* 3.8 3.1%
Iceland* 3.2 2.6%
Kwik Save 3.0 2.4%
TOTAL $101.0 82.4%
Notes: Source for U.S. data is Weir, T., “53rd Annual Consumer Expenditures Study: Sales Boom with the
Economy”, Supermarket Business, Vol. 55, No. 9, September 15, 2000, pp. 27-45. Source for U.K. data is
Marketing, “Is Safeway Falling Too far Behind”?, May 23, 2002, p. 17.
* Indicates company with an online retail channel.
13Exhibit 2. Comparison of Current Internet Grocers and Webvan
Ocado Sainsbury’s Tesco2 Albertson’s3 MyWebGrocer.com4 Webvan5
www.Ocado.com www.sainsburystoyou.com www.tesco.com www.albertsons.com www.mywebgrocer.com
Corporate Headquarters
Hatfield, England London, England London, England Boise, Idaho, U.S. Chicago, IL, U.S.
Delivery Area
1.2 million people in 53 stores 95% of U.K. Seattle, San 26 grocery stores/chains, 126 Chicago, California (5
service area north of 73% of U.K. Diego/southern Cal., individual stores, including: hubs), Portland, OR,
London and Central Portland , San Piggly Wiggly (Rome, GA), Seattle, Dallas/Ft.
London as of July 31, Francisco. Lowe’s (Winston-Salem, Worth, Atlanta
2002 NC), D’Agostino (NY city).
Sales Information
Not Available $22.3 Billion $30 Billion (in 2001) $38 Billion $40 million online sales $178 million (2000)
$165 Million (online) $520 million (Online) $242 Million $1.5 million in fees to
(Online)1 MyWebGrocer6
Pricing
₤5 ($7.50 delivery for ₤5 ($7.50 delivery) $5 - $10 (delivery) $9.95 (delivery) $10 ($8 for over $75 dollar No charge on orders
orders < ₤75), free for $4.95 (Pickup) order) for D’Agostino. over $50 – initial.
orders > ₤75. $4.95 pickup; $19.95 No charge on orders
delivery; Lowe’s. over $75 – later.
Picking/Order Gathering
Semi-Automated Manual picking-nearest Manual picking- Manual picking- Manual picking-nearest store Automated picking-
picking at central DC store, except London nearest store nearest store central hub
– Hatfield, England. where picking is from
semi-automated DC.
Delivery
Delivered from Delivered from nearest Delivered from Initially, only pickup. Pickup or delivery within Hub and spoke
Hatfield DC., with a store, except London, nearest store Later, delivery within restricted area delivery system from
spoke system for where delivered from 6-8 mile radius centralized picking
delivering to outlying picking center. centers.
areas
1
Notes: According to company press releases (www.Albertsons.com), sales increase 1-10% when online ordering is offered. Figure calculated using
conservative estimate of a 4% increase in sales across 390 stores. 6 This estimate is the authors’ based on a review of information available on
the company’s website. MyWebGrocer charges a fixed $5 fee per order handled.
Sources: 2 Hall (2001) and Tomlinson (2000); 3 Koller (2001) and Urbanski (2001); 4 www.MyWebGrocer.com; 5 Himelstein and Khermouch (2001)
and Rizzo (2001)
14Exhibit 3. A Simplified Grocery Supply Chain
Manufacturers,
Processors and Growers Grocery Stores
Distribution
Center
(Typical Annual Volume
$500 million - $1.5 billion)
Ocad
15Exhibit 4. Cost estimates for various grocery picking and delivery options
Picking Estimates
TescoA OcadoB
Customer Store-based Central DC picking
picking
Items/Hr 64 120 200
Average Order 32 items 64 items 64 items
Labor Cost ? $16.50 $16.50
Equipment & ? $40 million DC designed to handle 20,000
Overhead Existing Store orders/day
Delivery Estimates
Orders/Hr 2.5 2
Labor cost/Hr ? $16.50 $20.00
Van CostC ? $40,000 $60,000
Van cost/orderD ? $3.00 $2.50
NOTES: A Picking data from Reinhardt, “Tesco Bets Small – and Wins Big”,
Businessweek, pp. EB26-EB32, October 1, 2001. Delivery data are authors’
estimates.
B Data based on author estimates. Higher cost of van and delivery labor is based
on Ocado’s desire to use personal delivery as a distinctive competence rather
than a low-cost activity.
C Assume that delivery vans are depreciated over 5 years and that the DC is
depreciated over 10 years.
D Van cost/delivery includes cost of gasoline/petrol and maintenance of vehicles.
Tesco and other store-based pickers have lower costs per delivery because of
greater proximity to customer and can make more deliveries per order.Exhibit 5. Sample list of Customers with Delivery Slots
Customer Location ID X-Location Y-Location Traffic Delivery Window
DC 0 0 0 1 NA
Melnick 1 4 4 1 9:00 AM - 11:00 AM
Smith 2 8 -4 1 11:00 AM - 1:00 PM
Lee 3 -17 -25 3 1:00 PM - 3:00 PM
Guyton 4 -21 11 2 3:00 PM - 5:00 PM
Farran 5 25 4 1 3:00 PM - 5:00 PM
Christenson 6 5 -19 2 1:00 PM - 3:00 PM
Robb 7 4 13 1 11:00 AM - 1:00 PM
Diorio 8 15 -25 2 9:00 AM - 11:00 AM
Azzouz 9 -15 25 2 11:00 AM - 1:00 PM
Senk 10 19 -14 2 3:00 PM - 5:00 PM
Turnley 11 -18 -5 1 1:00 PM - 3:00 PM
Wong 12 1 3 1 9:00 AM - 11:00 AM
Seagraves 13 25 -11 2 11:00 AM - 1:00 PM
Lowery 14 -9 -4 1 1:00 PM - 3:00 PM
Hale 15 5 18 3 3:00 PM - 5:00 PM
Taylor 16 4 -15 2 9:00 AM - 11:00 AM
Trosko 17 5 6 1 3:00 PM - 5:00 PM
Wilson 18 20 -3 1 1:00 PM - 3:00 PM
Brown 19 -8 -8 1 11:00 AM - 1:00 PM
Tomber 20 -6 15 2 9:00 AM - 11:00 AM
Shaw 21 0 14 2 11:00 AM - 1:00 PM
Remold 22 -14 -8 1 9:00 AM - 11:00 AM
Palmgren 23 1 20 3 11:00 AM - 1:00 PM
Martin 24 7 -20 2 3:00 PM - 5:00 PM
Leventhal 25 4 3 1 3:00 PM - 5:00 PM
Joshi 26 8 2 1 3:00 PM - 5:00 PM
Hengemuehle 27 -24 -23 3 1:00 PM - 3:00 PM
Boyer 28 -1 21 2 1:00 PM - 3:00 PM
Gifford 29 3 -8 2 9:00 AM - 11:00 AM
Frohlich 30 -12 -20 3 9:00 AM - 11:00 AM
Evon 31 3 24 3 11:00 AM - 1:00 PM
Cline 32 3 -13 2 11:00 AM - 1:00 PM
Rodrigues 33 -20 0 1 3:00 PM - 5:00 PM
Baillie 34 13 6 1 9:00 AM - 11:00 AM
Abbas 35 -15 -16 3 1:00 PM - 3:00 PM
Chang 36 -9 9 2 11:00 AM - 1:00 PM
Eubanks 37 24 -2 1 9:00 AM - 11:00 AM
Hult 38 -12 -3 1 3:00 PM - 5:00 PM
Griffin 39 3 14 1 1:00 PM - 3:00 PM
Larriva 40 9 -14 2 3:00 PM - 5:00 PM
Marinez 41 -20 0 1 1:00 PM - 3:00 PM
Mollsen 42 20 -7 2 9:00 AM - 11:00 AM
Quispe 43 0 -21 3 1:00 PM - 3:00 PM
Pyle 44 -8 0 1 1:00 PM - 3:00 PM
Sanchez 45 7 1 1 11:00 AM - 1:00 PM
17ENDNOTES
i
Hall, J., “British Supermarket Giant Cooks up Plans to Go Global – Tesco’s Move to Duplicate High Growth at
Home Comes with Big Risks”, Wall Street Journal, July 5, 2001, p. A9; and Koller, M., “Grocer Builds Net Traffic
– Albertson’s Expands in Seattle, Pushes Online/Storefront Strategy”, Internetweek, No. 872, August 6, 2001, pp.
13-14.
ii
Weir, T., “53rd Annual Consumer Expenditures Study: Sales Boom with the Economy”, Supermarket Business,
Vol. 55, No. 9, September 15, 2000, pp. 27-45.
iii
Urbanski, A., “The Super 50”, Supermarket Business, Vol. 56, No. 4, April 15, 2001, pp. 1-18.
iv
Industrial Distribution, “Universal Product Code turns 25”, Vol. 88, No. 10, Oct, 1999, pg. A7.
v
Taylor, T.C., “The Great Scanner Face-Off “, Sales and Marketing Management, September, 1986, Vol. 137, No.
4, p. 43.
vi
Veitch, M., “E-Grocers Square up for Food Fight”, VNUNET.COM, April 23, 2002.
vii
Wearden, G., “Sainsbury’s Online ‘Far from Profitability’”, news.zdnet.co.uk, May 29, 2002.
viii
Op. Cite, Urbanski.
ix
Op. Cite, Koller.
x
Krantz, M., “Old-Line Firms Thumb their Noses at Naysayers: Bricks and Mortar Rule for Investors”, USA Today,
August 23, 2001.
xi
Press Release, MyWebGrocer.com, June 10, 2002.
xii
“Ocado’s Online Grocery Gambit goes Live”, E.Logistics Magazine, February, 2002.
xiii
Himelstein, L., and Khermouch, G., “Webvan Left the Basics on the Shelf”, Business Week,
July 23, 2001, p. 43.
xiv
Sell, Shawn, “When the grocery shopping gets tough, take away the scanners, give me back the clerks”, USA
Today, pg. 10D, May 19, 2000.
xv
Ibid.
xvi
Reinhardt, A., “Tesco Bets Small – and Wins Big”, Business Week, pp. EB26-EB32, October 1, 2001.
xvii
Spindler, M. “Grocers find Profitable Growth in the Darndest Places”, MyWebGrocer Press Release, June 10,
2002.
xviii
Anders, G., “Co-Founder of Borders to Launch On-Line Megagrocer”, Wall Street Journal, April 22, 1998.
xix
“Ocado Moves into Full Launch Mode”, E.Logistics Magazine, February, 2002.
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