P
anic is sweepingthrough supermarket aisles. Profits are mea-
gre, convenience is king, discounters are rife. Even Amazon,
Walmart and Alibaba, the world’s three biggest retailers, are trem-
bling. No one has fully mastered the art of selling groceries online.
The business represents just 2.3%, or $160bn, of a worldwide groc-
ery market of $7trn. As that share rises, as it will surely continue to,
it could be life or death for some in the industry.
In the midst of this mêlée is a fast-talking Brit, Tim Steiner. The
firm he co-founded, Ocado, has shaken up the British online retail
market, and it is trying to do the same internationally. By selling
expertise from almost 20 years as a pioneering online grocer to su-
permarkets in America and elsewhere, he wants to help them be-
come a fourth force in the industry—able to resist the big three.
His patter is honed by a career battling doubters (an analyst
once put him down with the quip: “Ocado begins with an ‘o’, ends
with an ‘o’, and is worth zero”). Sceptics still harbour deep reserva-
tions. Though Ocado has more than tripled in value in the past two
years to £7.5bn ($9.6bn), its share price has plunged recently. But
his insurgency shows how the battle to dominate online groceries
remains wide open. Ocado has as good a chance as anyone.
Grocery is a sadomasochistic business. Sellers can count on
stable revenues but have little margin for error on sourcing, price
and waste. Shoppers suffer from a retail version of Stockholm syn-
drome. They are lured by grocers with the promise of savings, only
to be fleeced. Shops make them do the work of picking the produce
and bagging it. They set traps in the aisles—in the form of strategi-
cally placed celebrity magazines or freshly baked doughnuts—to
slow shoppers down. Yet customers continue to return for more,
despite having ever more options to order online and have grocer-
ies delivered to their doorstep. In China and America, online groc-
ery shopping is a miserly 3.8% and 1.6% of the total, respectively.
Mr Steiner, a former Goldman Sachs bond trader, has pulled off
the rare feat of making home-delivery both tolerable for shoppers
and profitable for sellers. He knows how to squeeze the last
farthing out of a tomato and has turned the sorting of groceries in
warehouses into a science—specifically, clever robotics—which
has kept costs competitive. Partly thanks to Ocado, Britain trails
only South Korea and Japan in its embrace of online grocers.Earlier this year Mr Steiner persuaded Marks & Spencer, a Brit-
ish retailer, to pay £750m for a half of Ocado’s domestic
online-grocery business. The money is helping develop his firm’s
newer, more lucrative international venture, which licenses the
know-how to build modular high-tech warehouses that can be
scaled up as needed. The biggest deal, struck in 2018, has been with
Kroger. The American supermarket chain aims to order 20 Ocado
customer fulfilment centres (cfcs, or, as Kroger calls them, sheds)
by 2021, far more than the four that Ocado has so far erected in Brit-
ain (the newest burned down this year). Despite their recent slide
Ocado’s shares still trade like a software firm’s, not a supermar-
ket’s. JPMorgan Cazenove, a broker, said last month that the firm
would need to announce 126 cfcs to justify a recent valuation of
£9bn, three times the number it has planned.
Kroger’s sheds, which may take up to five years to complete, al-
ready give a sense of the emerging grocery battle lines. They will be
big, up to about 33,000 square metres (350,000 square feet),
though they can be flexed up and down. They will sit on the edge of
cities. Ocado aims to make up for the long drives to deliver grocer-
ies by speeding up its robots, packing crates of 50 items in six to
seven minutes. There will be no time-pressed “pickers” elbowing
shoppers aside to fill an online order, as in other supermarkets.
But the Ocado model, which works well in urban Britain, is as
yet untested in more sparsely populated places. In America and
China others are moving in a different direction—and in a hurry.
In 2017 Amazon sent shivers down American grocers’ spines by
buying Whole Foods. On November 11th it confirmed that it was
opening its first grocery store in California that is not part of that
upscale chain. Last month it launched free delivery of Amazon
Fresh, a grocery service, to its Prime members. So far its bark has
been worse than its bite. By one estimate only 6% of its sales are
perishables, compared with 65% at a traditional grocer.
Amazon’s domestic rivals are making existing supermarkets
the kernel of their online operations, either for picking up orders
or delivering them. Close by will be micro-fulfilment centres,
which will seek to emulate Ocado’s efficiency, but cut down on tra-
vel times. The model is Walmart, which cited sharp growth in on-
line grocery from its supercentres in America as a reason for high-
er sales this summer. Last month it launched a service in which
employees in three American cities can deliver groceries directly
to customers’ fridges when no one is home, using smart-entry
technology and wearable cameras. It also promises same-day de-
livery under a membership programme like Amazon Prime.Open sesames
Alibaba’s high-tech Hema supermarkets in China are more cut-
ting-edge still. They use qrcodes on fish to validate freshness, en-
able app-based shopping, have robots aplenty (naturally) and offer
30-minute delivery within a small radius. Yet it is unclear if
Hema’s technology will succeed where armies of cheap labour,
ready to sort, pick and deliver groceries, have mostly failed.
No one has as yet quite cracked the problem. More wizardry,
perhaps virtual-reality headsets, may be required to make internet
grocery shopping as intuitive for people as it is offline. But the in-
centives for grocers to press ahead are huge. No relationship in re-
tail is as intense as that of shoppers with their supermarket. Few
firms have as many eggs in the online-shopping basket as Ocado. If
things do not work out, at least the Kroger deal has made Mr
Steiner a rich man. If they do, he may be a rare example of a British
entrepreneur with global ambitions who is not off his trolley. 7Schumpeter Tomato catch-up
Ocado wages a grocery war against Amazon, Walmart and AlibabaThe EconomistNovember 16th 2019 Business 61