Will Ocado Ever Be Big Enough To Make Any Money?

What will become of Ocado if there really isn’t such a thing as a “grocery logistics” business?

Ocado gets bigger every year, but still no profit to speak of, just more capital invested in clever machines and more storage space:  like they are “doubling-up” on a bet.  They have industrialised the shopping process with ambient mini load cranes, a MASOPS packing system, and flow rate control software, but have yet to reach the optimum scale to become profitable.  The question is, will they ever?

Whilst they have grown on the back of a wave of enthusiasm for internet driven business initiatives, US analogues (who have mostly failed) and a partnership with Waitrose, who are fast becoming more of a competitor, they have chosen to ignore the fundamental problem with this business: there is only so much (and that isn’t much) people will pay to have their shopping delivered.  Ocado put it another way by saying that “grocery logistics is about cost domination”.  Maybe, but I doubt there is a business called “grocery logistics”!

In the UK it is hard to see how there is enough money, or demand, for a business to exist solely delivering our supermarket shopping.  The masters of the food supply chain, supermarkets, can do all this themselves if they so choose and have substitute products, like in-store pick-up, to complement home delivery.  They can offer more choice and satisfy more segments of demand for shopping convenience.  Ocado is betting everything on 40% penetration of home delivery (and its domination of this activity) at some point in the future, whilst the supermarkets can just sit back and see how it goes.

Even with the “appliance of science” Ocado seem to have operational constraints that stand in the way of them delivering against their plans, which isn’t very encouraging as they strive to be even bigger.  They are also diversifying into own brand products, non–food, and even selling other people’s stuff.  In this they are trying to copy the established supermarkets but, unlike them, they do not have the power in the supply chain to dictate pricing, or their depth of market experience, or balance sheet strength, which, taken together, will put them at a competitive disadvantage that even their lack of “bricks” is unlikely to overcome.

I don’t have a good feeling about Ocado.  I was once told that Conrad Hilton said that he loved owning hotels, but it was a mugs game to build one.  My guess is that Ocado will not succeed in transforming themselves, or ever reach a scale that will be either manageable, or make economic sense.  One way, or another, their heavily discounted assets will end up in the hands of someone better able to leverage them effectively, probably an established supermarket.

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