Since its launch in 2000 by three former Goldman Sachs bankers, UK grocery e-commerce business Ocado has offered investors much promise but little income. It didn’t make its first profit until 2014 – just £7 million from revenues of over £1 billion – and in 2017 it fell back into the red. This is despite being voted the best online supermarket in the UK by Which? readers every year since 2010 and signing supply and delivery partnerships with Waitrose, P&G, and Morrisons.
Unlike the online grocery options offered by incumbent supermarkets, Ocado was built from scratch as a pureplay e-commerce business, investing in bespoke technology and sophisticated robot-operated warehouses that were designed for fulfilling online shoppers, not stores. But as an exclusively online supermarket, Ocado’s growth and profitability was always going to be hampered by access to fresh produce and the high customer acquisition and retention costs required to counteract the lack of physical stores.
However, Ocado’s greater potential has always stemmed from its proprietary e-commerce platform and warehouse management systems. By licensing Ocado’s technology, robots, and IP (collectively branded ‘Ocado Smart Platform’), other supermarkets could launch their own advanced e-commerce businesses quickly with minimum upfront investment. Except none did. From its creation until 2017, not a single licensing deal was agreed. Investors got jittery and Ocado shares were among the most shorted in the UK during 2017.
Then Amazon bought Whole Foods, and suddenly every supermarket in US and Europe realised they were far behind where they needed to be for today’s digitally-savvy consumers. And they needed a solution, fast.
In November 2017, Ocado announced a licensing deal with Casino Group in France, which will use Ocado to leapfrog Carrefour in a market that’s seen little e-commerce innovation. This was followed quickly by contracts with Canadian supermarket chain Sobeys and Sweden’s ICA.
Then on May 17, Ocado bagged its biggest deal so far, with US grocery giant Kroger, which has taken a 5% stake in the business and the right to use Ocado’s technology for grocery and food distribution activities in the US on an exclusive basis.
This is a transformative deal for Ocado, firmly establishing it as a global e-commerce operating system for grocery. It could also be transformative for the US market. With online shopping comprising less than 2% of the market in US compared to 7% in the UK, there is ample room for growth for companies able to deliver a shopping and delivery experience that lives up to the expectations of today’s shoppers. Previously the only two players capable of winning the online grocery opportunity in the US were Amazon and Walmart. Now Kroger has entered the boxing ring to make it a three-way fight.