February 2002

The team behind Britain's most ambitious grocery home delivery roll-out are convinced that their mix of advanced technology, unbeatable service and measured expansion will earn them a lasting place in the e-commerce market. Peter Rowlands reports

Last month the Ocado online grocery retail business finally went live. If you live in the right area - which initially means Hemel Hempstead and St Albans (two towns just north of London) and their hinterland, you can now buy directly from its Web site.

It's a major step for this new player in the online marketplace. Although it has been running pre-launch trials since last autumn, these involved only 300 households, which were given special password access to its Web site (www.ocado.com). "They were literally friends and family," managing director Nigel Robertson told us.

 

Now the service is available to an estimated 100,000 households, and the site is open to anyone with Web access. Moreover, coverage is likely to be extended progressively to what the company calls "additional geographies", probably every two to four weeks. Eventually the whole of greater London will be covered, and adjacent areas will also be brought into the fold.

In other words, there will be no further big-bang launch. This is it; Ocado is a in business.

That means the company has now embarked on a path which will gradually put it into direct competition with Tesco Direct and Sainsbury's to You, the two big contenders in the online grocery market. And if it's got the sums right, it will emerge as a true third force in a market which Verdict has just predicted will increase two and a half times in the next five years.

Two years ago, when the concept was being hatched under the name Last Mile Solutions by three ex-Goldman Sachs directors (Jonathan Faiman, Jason Gissing and Tim Steiner), such a development would have turned few eyebrows. Now, in the wake of all the highly-publicised problems of the dotcoms, Ocado is bringing a breath of optimism into a bruised and much more cautious market.

Can it succeed? Nigel Robertson, who was previously a divisional director at Marks & Spencer, is bullish about its prospects, and pins much of his confidence on one key factor. "We're a stand-alone company," he says. "We're not dependent on high-street retailing, we're dedicated to home delivery. We were set up to do this and nothing else. We're not marginal to some other activity."

What Ocado does have going for it, of course, is 40 per cent ownership by Waitrose, the grocery division of the John Lewis Partnership, which has invested no less than £46 million in the enterprise. That means it can sell Waitrose products - and take advantage of the Waitrose procurement system. In a way it gets the benefit of being a dedicated operation, while at the same time having the security of a high-street partner and brand.

Clearly Waitrose for its part is well aware of the opportunities, and sees Ocado helping it expand beyond its current south of England focus. A flourishing Ocado would also boost Waitrose volumes in the south, where they are constrained by its generally modest-sized stores. Unlike Asda or Tesco, it does not specialise in giant out-of-town supermarkets, although a possible benefit is that shoppers probably see it as more upmarket than either of those.

Waitrose in fact already has its own online presence through its WaitroseDELIVER service, which offers goods from the same product range and delivers direct from its retail stores. But the two organisations have come to an agreement under which Waitrose itself will concentrate on more rural areas, while Ocado handles major conurbations. The two Web sites will simply cross-refer customers automatically between them on the basis of postcode.

So how does Ocado plan to gain an edge over its established rivals? Nigel Robertson offers a selection of unique features. "For a start, it's the only other place where you can buy Waitrose products online," he says. "Then we're offering one-hour delivery time slots, which is better than the opposition."

The delivery span is also unusually generous, extending to 10pm every night (including Sundays, significantly). The first delivery slot is 10am (8am on Saturdays). The delivery charge is £5, but is waived on orders of over £75.

The company is also aiming to offer a more personal service than rivals. "We'll even send someone round to your house to help set up the software if that's really what you need."

A very low level of product substitutions is envisaged. "Typically, other online grocers have a substitution rate of up to 15 per cent," Robertson says. "We will be able to achieve less than 5 per cent." Delivery of the wrong make or size of product is known to annoy online shoppers, so this could be a significant selling point if Ocado can achieve it. Robertson says the use of a single, central distribution point will be a key factor here.

Semi-automated

Eventually that distribution point will be based in a purpose-built 37,400 sq m facility at Hatfield, which lies on the A1 motorway about ten miles north of London. The semi-automated facility is now largely complete, externally at least, although Nigel Robertson says it will not actually be opening before the summer (a July date has been mentioned). Until then Ocado will be delivering from an existing 6,505 sq m warehouse on a major logistics complex operated by Gist (formerly BOC Distribution Services) at Hemel Hempstead, on the M1.

Ocado was originally expected to launch from Hatfield, but after forming a relationship with Gist, apparently realised the attractions of a phased launch starting from the existing Hemel premises.

Behind this measured development is the same cautious approach that has deterred Ocado from mounting a grandiose launch. Despite its extensive investment in new technology (see panel on page 18), the Hemel operation will be largely manual. A range of advanced systems is already being put in place, ready for use later on, but the company is keen not to run before it can walk.

"It makes sense to learn all the problems in the early days, before we commit advanced resources to the operation," Nigel Robertson says. "And believe me, there will be a learning process to go through. We don't have any doubt about that."

Gist will be running the existing warehouse for Ocado under contract, and will later take on the running of the new Hatfield warehouse operation. The initial deal is for five years. No major online grocery operation has so far outsourced warehousing, but Robertson says Ocado wanted to harness existing expertise in this specialised discipline. Gist already handles business of the e-commerce type for customers such as Marks & Spencer and Blueheath.

However, Ocado is managing the actual delivery operations itself, and sees this as a key to its success. "The interaction on the doorstep is essential," Robertson says. "That's why we don't regard the delivery staff as van drivers. They're service assistants."

For this reason, the company is not currently very interested in drop-boxes or other unattended delivery solutions. "According to our research, that's not what home delivery customers are paying for," Nigel Robertson says, adding: "From a psychological and logistical point of view, they're a long way from being a viable option." Experience will show, presumably, how true this turns out to be in practice.

Robert Gorrie, Ocado's logistics director, makes a particular virtue of the fact that his department isn't actually responsible for deliveries. "We hand over fully-loaded vans to the customer service department, and they're the people who deliver the goods."

Indeed, rather than drawing its drivers from what Robertson calls "the white van brigade", Ocado is keen on attracting people such as postmen and milkmen who might be looking for a job change. "We're prepared to train people to drive if they're genuinely interested in the role." The company is even offering childcare vouchers to help attract men or women who are at home looking after young children.

Ocado has aroused considerable interest in transport circles by specifying vehicles with removable or "demountable" bodies that can be pre-loaded while the chassis are out earning their keep. Although the swap-body concept has been well-established for many years, it has not so far been adopted much for grocery home deliveries, and offers intriguing possibilities.

However, the body-swapping capability will not be used in the early days. Robert Gorrie says it will come into its own as the area of coverage extends to more distant parts of London. The idea is to set up stockless satellite bases at key points, initially within the M25 area; pre-loaded bodies will then be trunked to these sites on larger vehicles carrying several at once, and transferred to the Mercedes-Benz Sprinter van chassis for final delivery.

"It makes sense to have bases within reach of local markets - not just operationally, but also from the point of view of labour availability," Gorrie points out.

Such an approach will also help the Hatfield operation to expand seamlessly to the point where it can cover areas well beyond London itself - almost certainly reaching as far as the south coast. The bodies will simply be trunked further afield prior to swapping. "We've specifically designed Hatfield with more capacity than we actually need for London," Robertson acknowledges. Indeed, ultimately Hatfield could be employing 700 people, the company says - many times more than the initial operation.

In terms of the supply side of the operation, we understand product will be trunked to Hemel (and later Hatfield) from the big Waitrose distribution centre at Bracknell. In effect, the centre will be treated like an extra store in the network - albeit a rather large one, since ultimately Hatfield will have a throughput equivalent to that of 20 retail stores.

As with any such grocery operation, very short-life product such as bread and milk is expected to be delivered by manufacturers direct to the centre, and clearly it will remain an option for other products to be delivered direct when volumes justify it.

Ocado is making no promises about when it will expand beyond the South East, but the expectation is that full network will be in place within five years. The long-term plan is to serve about 60 per cent of the British population, mainly in major conurbations - somewhat less than other such ventures have quoted, but perhaps a realistic reflection of the true potential. Nigel Robertson told us areas such as Plymouth would be unlikely to figure high on the priority list, whereas the other major conurbations would be.

Interestingly, this means Ocado is almost certain to build further large dedicated fulfilment centres. Even rival Sainsbury's, which has a dedicated fulfilment centre in the South East, has hung its northern home delivery operations on stores; but there are no Waitrose stores there, so Ocado will have to rely on its own resources.

Some reports suggest up to five centres eventually, although currently that is only speculation. In the company's favour, the Hatfield operation will give it invaluable experience as the rest of the network is rolled out.

The home shopping world will certainly be watching with fascination.

Advanced technology underpins fulfilment roll-out

An array of technology is being harnessed by Ocado to make its operation the definitive grocery home delivery service. Some is being used from day one, although other elements will only come into use gradually as the operation expands.

The Web site itself is built round the Netfinity suite from Intershop, one of the biggest e-commerce software developers. Netfinity is a large, scaleable solution that extends from user interface to catalogue management, transaction processing and back-office links.

Ocado is making strong play of its ability to trap any orders placed by consumers for out-of-stock product, and suggest alternatives. This "available to promise" feature is provided by a system called A-series from Armature, a UK-based software house specialising in retail stock management and replenishment systems. A subsidiary called retailing.net focuses on multi-channel solutions.

The Armature system dovetails closely with the Exceed warehouse management system already used by Gist, and particularly with components provided by Allpoints, a company EXE Technologies took over early last year. The full Allpoints suite included a range of capabilities such as planning and forecasting, visibility and supply-chain execution. EXE has been steadily integrating elements of these with its own systems.

DeliveryNet software from Canadian-based Descartes Systems will be used to plan deliveries, and a full mobile data package called Delivery Director has been supplied by Versatile Mobile Systems, a company with a Canadian base, but a strong market presence in the US - and increasingly in Europe too. This allows delivery information to be downloaded daily to handheld terminals carried by delivery staff.

These terminals, which are being supplied by Symbol Technologies, use the Palm operating system, and include built-in scanning and communications capability. Essentially everything the driver needs to know about each delivery will be provided in paperless form.

Under a contract announced last year, Versatile has handled the programming for the terminals, and has also provided its Enterprise Communications Server, which will gather data from the organisation's in-house systems and manage communication with the mobiles.

In the past, full online tracking of orders has been mentioned as an objective, and this system will presumably also prove invaluable as and when that becomes available.

Even the design and construction of the 37,400 sq m four-storey warehouse at Arlington's Hatfield Business Park has had a high-tech element. The project has been coordinated by Carillion, formerly the construction wing of Tarmac, which was floated in July 1999; and the management of design information is being handled over the Internet by BIW Information Technologies, using a system called BIW Information Channel.

This allows drawings, photographs and other data to be viewed and exchanged by participants securely over the Web ­ which was particularly appealing for Thyssen Ingenieria Sistemas, a Spanish company providing materials handling automation design for the project. On completion, BIW Information Channel will continue to provide a repository of data on the building and its components throughout its life.

Ocado's stake in bodywork supplier

Ocado's core delivery fleet consists of 3.5-tonne Mercedes-Benz Sprinter vans with special insulated demountable box bodies built by Paneltex of Hull. Ocado has taken the unusual step of acquiring a 25 per cent share in this company, which was founded in 1991 and has a wide-ranging portfolio of mainstream bodywork, military equipment and specialist items such as display units and mobile libraries.

The bodies are insulated and refrigerated, and have a quick-release connection to the chassis' electrical power supply. Access to the main body is provided via back doors and through a doorway connecting it to the forward load compartment.

We understand the swap-body system will be of the lift-off type, keeping weight down and allowing relatively standard fork-lift trucks to transfer bodies at remote sites. The clever aspect is that as the bodies are under 2.6m long, it will be possible to mount them sideways on articulated trailers and trunk them six abreast between main locations - a remarkably economic concept.

Paneltex has developed lightweight bodywork with seamless glass-reinforced plastics skins and Dow Styrofoam insulation, which is expected to last the life of two chassis.

The Sprinter chassis are fitted with six-speed Sprintshift automatic transmission rather than the usual five-speed manual gearbox to make them easier to drive in urban conditions. They are being supplied by Charterway, the Mercedes-Benz hiring and finance wing, under a five-year contract.