economics

May 11, 2010

Automation powers British e-grocer Ocado develops centralized operation that dispatches products to 65% of U.K. postal codes from a single location

Filed under: Uncategorized — ktetaichinh @ 3:54 pm
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HATFIELD, England—In a sprawling warehouse north of London, Web grocer Ocado Ltd. is making an expensive effort to bring high-tech methods to Internet operations that are often low-tech elsewhere.

Most online grocers fulfill Web orders by gathering goods from the shelf of a local supermarket and then loading them in a truck for delivery. But Ocado has developed a highly automated, centralized operation that dispatches products to 65% of British postal codes from a single warehouse.

The operation is spread across 9.2 hectares of floor space on an old airfield. Ocado has built a complex, automated system that gathers items using its own algorithm-driven system. Baskets travel along a 16-kilometer maze of conveyor belts, stopping at bagging stations where workers follow a computer’s directions, loading products and shipping off 90,000 orders a week with close to 99.9% accuracy.

Ocado labors in the long shadow left by companies such as Webvan, a San Francisco-based online grocery start-up that was founded in the late 1990s and extended its footprint rapidly using venture capital, but went bust in 2001.

Around that time, three former Goldman Sachs & Co. bankers started Ocado in a one-room office near London’s Victoria Station.

Now, after 10 years of steady growth, the company is considering what could be one of the biggest initial public offerings on the London Stock Exchange—estimated at up to £1.1 billion ($1.66 billion)—in the next two years.

Ocado has attracted £350 million in investment over the years, and it has high-profile backers, including consumer-goods giant Procter & Gamble Co., former U.S. Vice President Al Gore’s Generation Investment Management LLP, and Tetra Pak billionaire Jorn Rausing.

But the grocer faces some skepticism from analysts. They note that it still operates at a loss and relies heavily on a single retailing agreement with the upscale British supermarket Waitrose, whose parent company, John Lewis Partnership, holds 28% of Ocado as part of a pension fund.

Nonetheless, in unaudited figures released Monday, Ocado showed growing sales, diminishing operating losses and a jump in earnings before interest, tax, depreciation and amortization, or Ebitda.

Ocado had gross sales of £427.3 million for the 52 weeks ended Nov. 29, 2009, a 25% jump from the previous year. Though the online grocer operated at a loss of £14.4 million for the fiscal year, it posted £9.2 million in Ebitda, up from £2.2 million in 2008. The company’s operating loss narrowed 33% from the previous year.

On Monday, Ocado Chief Financial Officer Andrew Bracey attributed the improved performance to operational efficiency. “We have better availability, we have a longer range, we have fresher produce, and we’re able to deliver in a one-hour window,” he said.

Key to that is the high-tech system Ocado built in Hatfield to fulfill orders in the U.K, one of the fastest growing online grocery markets in the world thanks to the country’s bad weather, limited parking and widespread high-speed Internet access, among other factors.

At Ocado’s warehouse, orders flow in online, many via a popular iPhone application, and a computer system determines the fastest route each basket should travel through the distribution maze based on what groceries need to be packed.

The traffic-flow calibrations are the most complicated part of Ocado’s operation: All the routes are different, with colored totes passing one another at conveyer-belt intersections. The travel itinerary for each basket must ensure that small orders get out quickly and fragile items such as bread and eggs go in last.

Touch-screen computers that operate in English or Polish tell the workers, known as pickers, which product belongs where, and the system is constructed so the workers don’t have to walk or reach too far.

The Hatfield warehouse is the brainchild of Chief Executive Tim Steiner, who believed that superior technology would help Ocado “cost dominate” in a sector known for low margins.

Initially, the company tried bringing in outside logistics companies, but Mr. Steiner decided to build the system in-house, enabling Ocado to replicate the operation elsewhere.

Now, Ocado’s warehouse operates at only half of capacity and it could handle millions more in sales without a serious capital infusion, Mr. Bracey says.

One current U.S. operation that approaches Ocado’s is FreshDirect LLC. It sends out about 50,000 orders a week in the New York area from a central warehouse in Long Island City, but its operations aren’t nearly as technologically advanced as Ocado’s.

FreshDirect became profitable this year, but its CEO, Rick Braddock, says the company won’t consider an IPO until it has carried out a planned expansion.

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