Ocado Group

Established in 2000 and listed on the London Stock Exchange in 2010, Ocado started
as a pure-play online grocery retailer and has been referred to as the world’s largest
dedicated online grocery retailer by 2017 (Ocado Annual Report, 2017; 2019). In the last
few years, the Ocado Group has evolved to offer its technology as a solutions platform for
setting up online grocery businesses to leading grocery retailers in the world in partnership
(Ocado Annual Report, 2019). At its founding, Ocado partnered with Waitrose, which was
crucial for a company which lacked retail experience and brand value. Waitrose developed
its own online business later on but agreed to continue to supply Ocado. Subsequently,
Waitrose sold their shares in the business in 2011 and in 2013, while Ocado entered a
separate partnership with Morrison’s - licensing their proprietary software and equipment
solutions to help set-up Morrison’s online offering. Recently, Ocado set up a joint venture
with M&S to be known as Ocado.com – and will be their UK based pure play grocery
retailer. The Ocado Group also has other UK online businesses in pet food and in
homeware.

Ocado Strategy, Performance and Diagnosis

Grant (2019) and Collins and Rukstad’s (2008) article “What can you say what your
strategy is?”, provides a framework for understanding Ocado’s strategy, that is employed in
this report to analyse Ocado’s strategy using information from their annual reports and
other research. Ocado’s strategy is to create greater value for the company by leveraging its
intellectual property, knowledge and technology to develop, and run dedicated online
grocery businesses in collaboration with top retail companies from around the world.
Because of its heritage of developing the world’s largest dedicated online grocery business
in the UK, Ocado has over the years accumulated innovative assets and know how that
incorporate Internet of Things, robotics, big data and software analytics technology to drive
physical infrastructure from centralized customer fulfilment centres (CFC) and logistics to
deliver groceries to customers timely and conveniently and at lower cost. Whilst deciding to
keep their retail businesses in the UK, Ocado’s primary involvement in retail will be to aim
to increase market share of the total number of grocery retail transactions that go through
their platforms – hence Ocado’s business model has evolved to where it uses its technology
as a platform to help partners grow their business in return for fees (Ocado Annual Report,
2017; 2019). They will help or facilitate their partners to acquire medium-low income
customers in a target country’s online grocery market. They aim to meet this strategy by
providing a range of high-quality products at competitive prices, an optimised customer
experience and a market-leading delivery service, whilst utilising its unique customised
technology.
Ocado’s strategy is dependent on both a cost and differentiation advantage. Its cost
advantage is derived through the design of their centralised operations and processes,
specifically picking and distribution, leading to economies of scale via large customer
fulfilment centres (Ocado annual report, 2017; 2019). This can be observed from Ocado’s
operating costs of 23% of sales compared to “brick and mortar” online operations of 26.5%
in 2016 (Alvarez, Bell and Mcloughlin, 2016; Ocado Annual Report, 2019). Similarly, its
pre-tax earnings over capital employed amounted to 8.5% followed by Sainsbury’s at 8.4%
and Morrison’s at 6.6% (Alvarez, Bell and Mcloughlin, 2016; Ocado Annual Report, 2019).
Ocado’s unique levels of delivery service, with 95. % on-time deliveries and 99.0% order
accuracy, lead to minimal substitutions and fresher products (Ocado Annual Report, 2017;
2019). It can be argued that Ocado sacrifices some of its potential price premium by
charging similar prices to competitors in favour of gaining market share.
Ocado has delivered higher shareholder value relative to its main competitors such as
Tesco by outperforming the market but also in terms of fundamentals (e.g. higher earnings
per share (2.02p versus 1.70p; London Stock Exchange, 2019). More importantly, share
market differences are still stark: Ocado has 14% of online grocery market in the UK and
hence strategy needs to address revenue growth opportunities whilst maintaining cost
efficiency (Ocado Annual Report, 2019). In essence Ocado’s business strategy is currently
doing fairly well but, to assess how its future performance might be affected, we will
analyse external and internal factors.

Analysis of External Strategic fit

To analyse strategic fit externally, it is necessary to identify key strategic markets
segments and analyse attractiveness. The main revenue growth opportunities – online retail
and logistics and solutions (please refer to Table 1 in the appendix).
Ocado seeks to capitalise on the £7.6tn global grocery market and the accelerating
shift to online channels (Table 2). Customer expectations have also shifted significantly,
with advanced mobile devices in their hands, customers demand and expect immediacy,
personalisation, range and value and this has made development of artificial intelligence,
robotics and automation important drivers for businesses in retail. For those companies that
have mastered and developed relevant technology, new value creating opportunities include
applying that technology not just to the grocery online market, but also to other retail
sectors, and other verticals such as farming and parcel sorting. Grocery online retail
competition is growing from large companies such as Amazon, and the incumbents that are
all now moving rapidly to incorporate online channels – despite high entry barriers and thus
stocking fierce rivalry in a sector with already very low margins and buyers can easily
switch loyalties (see Figure 1). The industry faces very price sensitive customers and
formidable substitutes and hence low margins (Fung Global Retail & Technology, 2017).
Entry by Amazon and brick and mortar players has increased rivalry. On the other
hand, the solutions business based on proprietary innovation can be applied in various
segments that are high impact markets and with less competition. The large software
vendors and logistics software companies seem to have ignored developing an end-to-end
specialised solution to deliver an online grocery store. Faced with poor substitutes and low
buyer and supplier power - even though potential entry threats are high (see Figure 2),
Ocado seems to have a first mover advantage that it can capitalise on what it estimates to
gain 25% of market share in the key markets (Ocado annual report, 2019). Ocado’s
positioning to be a technology platform for global retailers in key competitive grocery
markets is therefore a consistent strategic fit.

Internal Analysis of Strategic fit

The Resource-based view identifies that a firm’s strategic resources and capabilities
are the primary source of competitive advantage (Grant, 2019). This depends on three
aspects: their potential to establish a competitive advantage (Valuable, Rare), to sustain it
(durability, transferability and replicability), and receive or appropriate the returns (Grant,
2019).
Ocado’s competitive advantage depends on their proprietary technology platform,
innovative capabilities supported by their ability to attract and retain talent through a global
network of collaborations with a range of partners and a reputable innovation focused brand
(see Figure 3). With a heritage in grocery retail, Ocado also has a core competence in online
grocery retail. However, though Ocado is highly valuable as a company in terms of market
capitalization, its operations are still small and requires building an international dedicated
team (e.g. that can speak many languages) in order to be able to exploit their technology
globally. Ocado also needs a much better developed sustainability strategy/identity, beyond
just converting to renewable energy and minimizing (retail) wastage (see Fig 2 on recourse
 mapping).
Ocado does well to experiment with use of their technology in other verticals and
applications such as vertical farming and investing in robotics, but it also faces the need to
growth aggressive in partnering with retailers to get global adoption of its platform and
benefit from network effects.

Mapping of Options, Prioritizations and Recommendations

Ocado’s best fit is to leverage its core competence in its technology platform and
partner with leading grocery retailers seeking to move quickly to online. However, it needs
to develop its team to be able to operate globally and in many languages. This requires
Ocado to choose key markets to tackle first and build up its international team
appropriately. In addition, to have a much better differentiated image, Ocado must
incorporate a much stronger sustainability strategy integrated in its operations and value
creation processes.

Partnership is the best way to gain market share in grocery retail and
consolidation of the sector should increase market attractiveness in the UK. Ocado
should delay going into general or specialist merchandise retailing as it should be
quite competitive but may continue to experiment with specialist retail options and
other applications as options for future value creation. Finally, Ocado Group is
right to confine grocery online retail to the UK and not to take that business
globally. That way, Ocado’s strategy achieves proper strategy fit going forward.

Ocado: options and prioritization

Solutions and logistics : best fit in terms of
attractiveness and Ocado’s competitive
High advantage
Solutions and logistics Global online: grocery: lacks local knowledge
Mail sorting Online Pet food UK: easy to do but too niche?
Market attractiveness

Online homeware UK: too much competition –

Vertical farming if enter may need a lot of consolidation
Mail sorting: not certain in terms of applicability
Online homeware Vertical Farming: not certain in terms of
applicability but competition may be low
Global retail online UK grocery retail UK online grocery retail: leading but competitive
Low
Online pet UK

Low Competitive advantage high

Appendix (you have two pages to fit any relevant analysis)
Table 1
Industry Online Grocery retail Online grocery retail
Solutions and Logistics
Description Development of CFC Retail operations, Product
warehouses; Proprietary range, sourcing, marketing
software and technology: and branding,
Robotics, Big Data analytics
and algorithms, Artificial
intelligence, Digital twins;
Internationalized project
teams
KSFs Fostering innovation: attract Competitive pricing, product
and retain talent globally; mix/range, branding,
brand, innovation focus, sourcing, investment,
global network operational efficiency,
customer experience
Profit potential Huge (fees for use of uncertain
platform)
Competition Low High

Table 2

Figure 1

online grocery retail

Figure 2

Grocery retail solutions and logistics

Figure 3
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