Ocado Group PLC (LSE:OCDO) boss Tim Steiner recently unveiled plans for a new generation of robots that could slash labour costs and increase productivity.
With a presentation reminiscent of how Apple founder Steve Jobs used to reveal the latest iPhone – and technology that was equally impressive, with faster and lighter robots, whirring picking and packing arms and an automated despatching system all shown to the public – some investors may ask themselves how an online grocery retailer morphed into a technology and robotics company.
A brief history
In 2000, Ocado was formed in a portacabin by Steiner and fellow Goldman Sachs employees Jason Gissing and Jonathan Faiman.
The Hatfield-based company has never had a physical store and opened its first 'customer fulfilment centre' in 2002 after agreeing a partnership with Waitrose.
The company launched its app in 2009, before offering its own range of products a year later.
By 2010, it listed on the London Stock Exchange – designated as a retailer.
Launching its first technology offices in Krakow, in 2011, the company signalled its first significant shift away from simply grocery delivery and toward the tech world.
The Ocado Smart Platform
It released the Ocado Smart Platform (OPS) in 2016. The OPS is described as an ‘end-to-end solutions platform that assists in the entire delivery process, from picking and packing to delivery’.
Since then, the company has been signing on partnerships with grocers around the world – teaming up with the likes of Kroger in the US and Casino Groupe in France.
In total, the company has nine agreements with retailers. Ocado provides access to the OPS, to implement in their own delivery services.
The system sees an order received - via one of the available channels, whether that be the Ocado app, or webshop, or any of the other options – which is then processed.
An order is ‘picked’ by a high-speed robot, zipping on top of a grid, obtaining products from below, readily available in crates. According to Ocado it can pick and compile a 50-item order in just five minutes.
Products are presently bagged by human employees, though Steiner’s presentation a few weeks ago revealed that one warehouse is trialling the use of robot packers, which may streamline the process further.
Finally, the OPS calculates the best route for the most efficient delivery possible.
According to the Ocado website, the OPS “offers retailers a flexible, faster, more cost-efficient and lower-risk way to develop an online grocery business, with limited capital investment.”
Robotics
A lot of the OPS is built on the use of robotics, in particular the Series 500 bots, which are the ones that complete the order picking process, Ocado plans to upgrade to the Series 600 bots in the near future.
Ocado, the online grocer, didn’t have the capability to create its own robots.
Instead, in 2013, Ocado turned to Tharus, a robotic company which has since developed key parts of the OPS. The first robots went into manufacturing in 2015.
The first robotically picked order was delivered in 2016, and the Tharus claims it was 10 times faster than any of its competitors.
Ocado subsequently acquired American robotics companies Kindred Systems and Haddington Dynamics.
Kindred is an artificial intelligence robotics company, while Haddington is a research and development company specialising in robotic arms.
What’s driving Ocado’s evolution?
The switch from focusing on online grocery deliveries to a technology and solutions provider came as Ocado aimed for a gap in the market whilst at the same time seeking to cut the cost of its own service.
Some commentators praise the move, albeit others will point out that it has changed the capital requirements that one might expect (if you thought you were looking at a retailer).
Similarly, as it invests in innovative tech, the profitability profile is also much more akin to a technology play.
“Ocado’s strength is being a technology innovator and a solutions provider, so through continued investment in robotics, at the detriment of profitability, it has shifted away from being a core grocery player to a leading, specialised tech firm,” said Honor Strachan, a sector head for food and grocery at GlobalData, an analytics and consulting company.
Strachan does argue however, that unless it can gain more partners and roll out technology faster, it will “continue to fail to turn a profit”.
Strachan also states that if the company wants to continue to innovate and shift further away from merely a grocery delivery service, it needs to start delivering a return on investment, or it risks standing still.
Stockbroker Shore Capital also pointed out that Ocado’s newly signed joint venture with Groupe Casino is likely to require the firm raise funds.
The joint venture will provide logistics services for any future customer fulfilment centre that may be built in France.
While Ocado said no capital expenditure will be required initially, Clive Black, who is head of research at Shore Capital, believes it will need to raise funds at some point.