One of the more popular business mantras to hit town recently has been: “Forget products, think platform!” The immediate result has been a world increasingly awash with platforms and, if you aren’t operating one, many will label you a strategy Luddite.
So among this melee of platforms, why might there be room for one more — a platform for online grocery delivery? To answer that question, one first needs to understand what makes online grocery delivery so different from other forms of online retail.
Online grocery delivery requires dealing with irregularly shaped products with many different form factors, multiple storage temperature regimens, short shelf lives, and food technology constraints about what can be packed with what. Then there are the many vulnerable products and the ways they can (negatively) interact with each other: if you load a six-pack of beer on top of a box of strawberries, you will most likely end up delivering a smoothie, which is probably not what the customer had in mind.
Then there’s the fact that an average online grocery order is typically fifty items and customers are sometimes ordering more than once a week, both of which have significant implications for how smart and low-friction the ordering process has to enable customers to complete their orders in just a few minutes. Most customers don’t get up in the morning and say to themselves: “Hurray! Today is my online grocery shopping day!” Most people subliminally dream of the day when, thanks to the power of data-fueled machine learning, the right groceries will turn up at the right time, as if by magic, without the customer having to do anything — a broadband of grocery.
Finally, there’s the challenge of creating a profitable ecommerce business: you have grocery products with an average item price of around $3 and typically 30 percent gross margin, leaving only $0.90 to pay for all handling, selling, and delivery. Brick-and-mortar stores are used to their customers doing this work for them; in the online space, that is obviously not an option.
So online grocery is hard, and doing it profitably demands extraordinary levels of efficiency powered by the creative application of technology and automation. For a traditional retailer, building that solution is a massive and daunting prospect. Yet online is also a phenomenon that is here to stay, because customers want the convenience, enjoy the choice, and appreciate the time they don’t have to waste trudging around a conventional store.
The great thing about having an online grocery delivery pipeline into customers’ homes is that, once it’s in place and being used regularly, all manner of other products and services can potentially flow up and down it. If you can do online grocery, then you can do some other forms of online retail; but the reverse definitely does not implicitly follow. The potential size of the worldwide online grocery market combined with these spin-off opportunities is why grocery really is the holy grail of online retail.
That’s the end business case we put forward at Ocado, the world’s largest online-only grocery retailer, currently operating in the UK. Unlike other online retailers, our customers’ orders are picked and packed in huge automated warehouses before being delivered to their kitchen tables in one-hour slots by Ocado’s own delivery fleet. All the technology that powers this disruptive business model has been built in-house over the past 17 years. Ocado has been profitable at an order level for many years but has chosen to invest heavily in building its technology platform.
When considering international expansion, why would we not just launch its service in another country? The answer is that grocery is an inherently local business. It’s an “at scale” game in each local market, and having scale in your home market does not help you enter another one. Branding is local, supply chains are local, and customer behavior and requirements vary.
The smarter alternative is to provide a shortcut to help existing grocery retailers move online fast instead, or grow their existing online operation efficiently. This would follow a model similar to how Ocado helped Morrisons (one of the big four brick–and-mortar grocery retailers in the UK) create its online grocery business using Ocado’s existing platform; Morrisons has since become the fastest-growing online grocery business in the world.
These offline retailers already have their trusted brand, their efficient supply chains, and their loyal customers. What they lack is the time, the technical expertise, and the financial investment required to develop a profitable end-to-end platform for online grocery delivery. Two things are certain, though: some of their competitors will move online and pure-play retailers will enter their markets.
That’s why we built the Ocado Smart Platform (OSP). It’s a one-stop-shop, end-to-end e-commerce, fulfillment, and logistics platform running in the cloud that provides a seamless integrated solution for an offline retailer.
Think of it as a highly configurable Software as a Service (SaaS) platform that also includes the swarm robotics hardware technology needed to build automated warehouses. This combination of cloud-based software and warehouse automation provide the secret sauce of how to make online grocery delivery profitable, and how to deliver enhanced customer delight in the form of massively greater range, greater product life and freshness, lower wastage, very low levels of substitution, and the ability to pick a complete customer order in just a few minutes.
Looking ahead, OSP customers will quickly see the network effects associated with adopting such a platform, including all the data we will collect to optimize the underlying platform and feed our machine learning, while also giving the retailers back their own data. Then there is the increased R&D investment on the back of having multiple customers and creating an ecosystem through easy integration with third-party products and services.
Ultimately, a platform for online grocery is more than just writing smart algorithms, mining customer data, and employing warehouse automation; it is based on understanding and adapting to the realities of the retail market, disrupting its existing business models, and recognizing that customer loyalty is earned through experiences instead of features.
Fifty years ago, customers would telephone their local grocery store. The person at the store already knew what they typically ordered — and would then have someone deliver the groceries on a bike or in a small van. The technologies and formats may have changed, but differentiation through brand, product range, customer knowledge, and customer service are still at the heart of being a great grocer.
Read more about how the Ocado Smart Platform can transform your retail business.
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