"We are solely focused on the online channel, and committed to providing the best customer shopping experience available."

As customer behaviour shifts towards shopping for groceries online, incumbent retailers are trying to adapt their existing businesses to meet this fundamental change. We are solely focused on the online channel, and committed to providing the best customer shopping experience available, without the distraction of legacy bricks and mortar operations. Our objective has been to be a cost leader and create a virtuous cycle between growth, efficiency and investment.

Ultimately the retail mission is to move a product from a supplier to a customer's home. However, traditional retail models only deliver half of this mission, moving a product only as far as the shop shelf. The customer performs the other half of the mission by coming to the store, "picking, packing and delivering" the product themselves. Notwithstanding, grocery retail remains a relatively slim margin business today. By offering online services, the retailer commits to complete the entire retail mission, including that part currently performed by the customer. The extra work entails additional cost for the retailer, and represents the fundamental challenge to the grocery retail industry.

There is no single strategy for online retailing. In grocery, different approaches are being adopted, with traditional supermarket operators largely using existing store based fulfilment. Some have started to build so called "dark stores", stores without customers or in effect small warehouses with limited automated processes, with a turnover similar to a typical supermarket dedicated only to servicing online orders. Both a store pick and a dark store approach incur the costs associated with traditional store retailing, but the incremental cost of picking, packing and delivery drives margins from the online channel down significantly.

By contrast, Ocado has adopted a very different approach with the objective of removing significant costs from the traditional grocery supply chain. We do this through the centralisation of our picking operation from large warehouses, which are over 20 times the size of a big supermarket, which aggregates activities to give each function scale, and through the use of automation and technology. We distribute orders directly from our picking facilities and through a series of local spoke sites located around the country.

"Ocado has adopted a very different approach with the objective of removing significant costs from the traditional grocery supply chain."

Our operating model removes many of the costs incurred in a traditional store or dark store model. These include redistribution costs of stock from a separate distribution centre, significantly reduced "put away" costs of stock into our pick aisles (the equivalent of a supermarket shelf), and the costs of a physical store network itself, with expensive real estate, multiple stock locations, manual processes, and poor economies of management and scale. As we grow and scale our operation further, we will benefit from the operating leverage inherent in our model. This will drive the virtuous cycle between growth, improving cost economics, and investment into the proposition to customers.

Our model also gives natural benefits to the customer. Our food should be fresher as it take less time to reach the shelves and spends less time on those shelves. We have higher predictability of stock available than a single store. We are able to make new range extensions available to all our customers very quickly from central locations, enabling us to add products to our range quickly and effectively without a high risk of stock obsolescence. The significant knowledge we have developed has resulted in industry leading delivery metrics which underpin our customer service proposition.

Our commitment to environmentally friendly and sustainable business practices is supported by our operating model. The efficiency of our model ensures we have what we believe to be the lowest product waste levels in the industry. We believe our model to be a more energy efficient way to distribute groceries into customers' homes. We use closed refrigerated areas in a limited number of buildings. Furthermore, every delivery we make potentially reduces up to 20 customers making the journey to and from a supermarket.

We have developed this pioneering approach to grocery retail over 13 years using our own bespoke systems, know-how and software, making our operation difficult to replicate.

The Conventional Way
The Ocado Way

Business benefits

Removes requirement and cost of separate (regional) distribution centres to receive stock from suppliers, re-palletise and redistribute to store/dark store network, as we receive stock directly from suppliers or wholesalers

Automate stock “put-away” processes reducing operating costs

No physical check-out process, because we have no stores, reducing labour costs

Significantly lower product waste from faster stock turn, representing both a cost saving and more sustainable food supply chain

Significantly lower property and occupation costs through, for example, cheaper real estate (we use warehouse space not expensive retail space) lower energy usage, and better economies of management and scale.

Customer benefits

Convenience of ordering online, saving time and effort of going to the store, with the leading on-time delivery service

Faster and more extensive range extension as stock has only to be held in two locations (today)

Higher predictability of stock, improving ability to fulfil customers’ orders accurately and with minimal substitutions

Fresher products as the supply chain from suppliers is generally shorter – we guarantee the life of our fresh products

Cost savings generated as a result of our operating model allows for investment into prices, giving the customer good value at competitive prices

The significant cost savings from the business benefits enable us to invest in picking and delivery services for the benefit of our customers