Ocado’s first steps to creating a global online grocery provider

By Paul Hinds, senior vice president of international retail solutions at IRI

Towards the end of last year Ocado was under pressure. Investors were getting impatient that it hadn’t tied up more deals with retailers and its share price had taken a fall. Since the landmark deal with US grocery retailer Kroger in May, the fortunes of this British online retailer are certainly brighter. Moreover, it’s certain to shake up the online grocery market.

The partnership highlights the current status quo with grocery retailers around the world. That surprisingly a significant number of retailers still do not have their online offering cracked given the challenges of massive investment, experience and proving ROI for the channel.  However, consumers want to be able to shop on their terms and they expect to be able to choose whether they shop via a user friendly app and website for their groceries or in store. This makes it a necessity to have an online channel that compliments the traditional store channel, as it is an essential touchpoint between the retailer and its customers. A softer benefit is the fact that this establishes a direct relationship and the potential to use insight and CRM to stimulate incremental shops via offers and targeted communications.

The other pressure point for retailers is that when they launch their online channel, they need to get it right straight out of the box and if they don’t, the failures will be shared millions of times across every social and media channel available. Providing a seamless shopping experience is critical. Online is an important part of the brand experience and retailers are understandably keen not to mess it up.

Ocado offers a quick and low risk route to market with a plug and play solution. Its years of experience managing online for retailers including Waitrose, Morrisons and Carrefour, make it the safe bet to go for. In recent years though it has effectively re-branded from its original purpose as an online retailer to a leading technology provider. This takes any retailer partnership to a new level.

For Kroger, one of the world’s largest retailers which is second only to Walmart in terms of US grocery market share, Ocado’s offer – including its ready built platform and experience – clearly outweighs the creation of an internal solution. It’s likely to be the quickest and most economically viable approach available for Kroger to provide customers with an online option. And famous for its Customer First philosophy, online is a natural focal point for Kroger. It would be keen to get a head start in the developing US online grocery market. The partnership gives Kroger the opportunity to transform the way US customers buy grocery. It could potentially, according to Ocado’s chief executive Tim Steiner, “reshape the food retailing industry in the US in years to come”. Whilst this is a bold statement, it underlines Kroger’s intentions, which will be to set the highest standard possible for multi-channel retail in the US. They will be able to do this off the back of the highly automated, efficient and fast platform Ocado will provide. The ease of order, speed (and convenience) of delivery and of course quality of the product when it arrives, will be the deciding factors.

The announcement comes at an interesting juncture in the market, with the entry of Aldi and Lidl. These two powerhouses of retail are fuelled by their success elsewhere and have boldly decided to tackle the US. However, they are in the camp of retailers who have so far not fully embraced the online channel, so one interpretation of Kroger’s decision could be that is part of their strategy to diversify their sales strategy and combat these new competitors.

The partnership provides a great opportunity for Ocado to prove its worth in one of the world’s largest markets. Many other UK retailers, including Tesco, have tried and failed to crack the US. The difference here is that Ocado are not trying to adapt a UK retail model or launch a new brand from scratch in what is an incredibly competitive model. Proving its platform and online expertise with Kroger will enhance Ocado’s credentials even further on the global stage.

This deal also highlights one of the trends that has been around for decades in global retail – the search for innovation in other markets and learning from non-competing retailers. Retailers love to hear what other retailers are doing in other countries. Informal knowledge sharing across markets is extremely common within retailers, particularly when they have a specific and proven technology asset like Ocado. You can see why this becomes an attractive proposition for a formal tie up.

Ocado look to be establishing a simple but effective business model ie to identify a retailer who needs to urgently establish an online channel, leverage its experience (and global credentials!) and close the deal with exclusivity for a particular market so the retailer knows it will be their focus.

Should the Kroger deal be a success (and there is no reason why it will not be), Ocado will be the global online channel provider of choice.

Commentary provided by Paul Hinds at IRI