British warm to old-fashioned grocery shopping-online

By Guy Clapperton
THE GUARDIAN , London
Saturday, Nov 22, 2003, Page 9

You know there's something vaguely odd about the universe when you put in an order for lemon juice and, because the supermarket in question hasn't got any, they send a pair of lemon-scented kitchen gloves instead. You also know there's something peculiar going on when you order some butter and, when your chosen brand isn't available, the seller says there's no alternative, rather than sending you a different brand. And things are getting mighty peculiar when people start claiming that home-grocery delivery is something new -- when any number of aging gentlepersons will assure you they remember their mother getting things sent round from the local shop in, oh, 1935 or thereabouts.

But home delivery -- specifically when the ordering is done on the Internet -- is indeed seen as a new thing regardless of the accuracy of the perception. And it's growing. Ocado, the online version of British supermarket Waitrose, started in a limited capacity in the southeast, but it's now spreading to the Midlands. All might appear to be rosy in the garden except for a touch of blackfly concerning board-level reshuffles and exits over the past fortnight, as well as a heavy loss of ?76.8m (US$130.4 million) between the start of trading in June 2001 and last month.

Ocado executive Tim Steiner counters any negative comment on the moves and losses by suggesting they're all planned for. Joint managing director Robert Whiteside has confirmed he will leave the company, and reports suggest that the other joint managing director, Nigel Robertson, is ready to clear his desk, leaving Steiner in charge on his own.

"It's happening for positive reasons," Steiner says. "We didn't need seven directors and that was what we had. We all agreed it wasn't necessary."

The losses, however, were part of the initial business plan, he suggests.

"Some companies can take 25 years growing to the stage where they're big businesses; we're doing it in two years so we can compete with people like [rival supermarket chains] Sainsbury's and Tesco, and that takes investment, which turns up on a balance sheet as a loss even if it was expected from day one," he says.

"All of our trading partners accept this and support us," he says.

Assuming other things are equal, Ocado's growth is impressive. Figures from media tracker Hitwise suggest it's nowhere near the top few online grocers -- Tesco has the number one slot by a fair margin, with Sainsbury's and Asda bumping along more or less joint second throughout the year -- but then as a regional rather than a national service that is to be expected.

In terms of its own growth, as distinct from a comparison with the rest of the market, it's been growing 5 percent to 10 percent per week, Steiner says. As Hitwise says, online grocery shopping has expanded 27 percent in the past 12 months, so it can be gathered that Ocado is growing at about twice the typical rate for its sector, which itself is growing much faster than the economy.

What's about the online grocery market, however, is not so much the fact that it takes place on the Web -- any reasonably competent web writer can set up a Web site that will handle credit card transactions with off-the-shelf software; you no longer need a highly paid consultant or designer.

No, what's truly interesting is the method by which the products reach your door. Certainly, early experiments with the medium fell flat in southeast London when one of the major supermarkets neglected to buy enough delivery vans to serve the Norwood area; the service was pulled for a while and subsequently relaunched.

The dreaded product substitution syndrome started to strike shortly afterwards, depending largely on the initiative of the person picking your product from the shelves. In recent months at least one Ocado customer found the company was unable to think of a substitute for a pack of a particular brand of butter (hint: a pack of another brand would probably do the trick).

Steiner briefed to investigate the butter incident and concedes that it sounds like an error, but he stresses that his company makes fewer of these than most of the competition.

"We have about 2 percent customer returns or substitutions, the competition has between 10 and 15 percent," he boasts.

He attributes this to the shape of the business model: As the name indicates, Ocado isn't part of Waitrose, it's an independent company and it ships direct from its warehouse. And its systems are linked directly to the warehouse's stock control.

In practical terms this means there are no customers on site and the IT systems should always know what's on the shelf and what's on order. In principle this means nothing you can order from the Web site is actually unavailable, because when it goes out of stock or isn't on order it will be withdrawn from the online display. There are exceptions of course.

"If someone orders some tuna steaks we might order 100 from the ports; when they come in they can be dropped or end up as sub-standard for other reasons by the time they reach us. So if only 80 steaks in pristine condition come in we can only sell 80, so 20 orders will remain unfulfilled," he says.

Our reader with the butter (or indeed without the butter) was most likely plain unlucky.

"Something happened to your butter," says Steiner, earnestly. "Between being picked from the warehouse and loaded up maybe it was dropped, maybe it had milk spilled on it, but something happened. And depending on where in the cycle it happened it may not have been easy to replace it within our system."

It was a piece of cake for the reader, he just went down to Tesco and bought some.

Ocado be further infiltrating the Midlands towards the end of this year and will push into other areas during next year. One of the organization's advantages is that it will be growing into areas outside the southeast in which Waitrose hasn't actually got a direct presence.

One Steiner plans to resist is to become identified as some sort of premium brand, as Waitrose is.

"A Which consumer survey recently put Waitrose top for quality and second behind Asda for value, with Tesco and Sainsbury's coming behind that," he says.

"There is a perception that we sell only to affluent people. That's not always the case -- it's certainly not the only group I see when I go on delivery rounds," he says.

Delivery and other factors often mean the perceived "shop" price is different from the delivered value when ordering online.

What from here in the online supermarket arena is mostly up for grabs. Steiner says his plan is for Ocado to pull into profit "soon" and won't be drawn any further.

For the moment he's happy with growing at 5 percent per week -- presumably accompanied by a blip when the Midlands takes off. But anyone can sell loads of goods while spending more money than they're making; the proof of the tinned or instant pudding will no doubt be in seeing when Ocado starts to pull into profit.

Until the idea that their business model works has to be taken on trust, while the competition sends its staff into the shops to do their online customers' shopping for them.

Scoff people with other ideas might, the old-fashioned approach seems to be profitable.