Why Ocado (and Amazon Fresh) are doomed

Remember when supermarkets started doing online deliveries? And it turned out that they just had people going around their own stores picking out items to send to people?

Oh, how we laughed. “What a silly way to do it” we jeered. “Why don’t they have one central warehouse where they can do everything efficiently?”

I don’t think supermarkets did it this way because they thought it was the best way. I think they did it because of path dependency: they already all of these stores and it was the easiest way to do it. However, here we are a decade later, and it turns out that their approach is the best.

In fairness, I’m being overly provocative with my headline. I’m a fan of Ocado. You can read my review of Ocado here. But my guess is that if they want to build on their success in the long-term, they have some fundamental business challenges to overcome.

This is why…

Why is Amazon looking for retail space?

The story starts as many do, with some fascinating insight from Scott Galloway. He said that Amazon would eventually buy a large department store.

Why? Because such a company would have stores in every major city. This is important because it allows Amazon to deliver products quicker. One of their big problems is time: I can drive to the shop and buy something instantly. And customers love instant gratification. Amazon cannot deliver that, which is why they are spending time messing around with drones.

Jeff Bezos has always wanted to find a better way to do this. In Bezos’s biography, The Everything Store, Brad Stone talks about how Bezos wanted to hire college kids to keep a stock of Amazon products in their bedrooms and cycle them round to customers the minute they ordered.

Short of that, Amazon needs a distribution facility in each area to allow them to get products to customers quickly. That is tough when you operate a huge monolithic centre. But way easier when you have loads of local stores.

What does this mean for Ocado?

Ocado has the same problem that Amazon does. They operate out of a giant warehouse down south. This means that you have to pick the orders there and drive them to every corner of the country. Doing this is expensive for Ocado and slow for consumers.

Compare that to the major supermarkets: Sainsbury’s have their warehouse located literally only a few miles from my house. And everybody’s house. And running this warehouse costs them practically nothing because the stores are profitable in themselves.

Therefore, even when you add the cost of an inefficient system in which employees go around the shop picking out items like an in-store customer would, it still produces a business model that works and works well.

What can they do about?

Ocado needs to find other ways to compete. Amazon was successful in competing against existing high street stores. It did this in two ways. 1) it offered cheaper prices and 2) it offered a way bigger selection. Their tagline is, after all, “Earth’s biggest selection”.

Ocado doesn’t do this. Their prices are more expensive. Their selection is good, but not amazing. Take fish, for example. The selection at most supermarkets is rubbish: cod, salmon, seabass, maybe some tuna or another white fish if you are lucky. Morrison’s is a bit better. Ocado better still: their selection is maybe twice as big.

But, as Peter Thiel points out in Zero to One, if you want to do the same thing as everyone else, you can’t be 2x better: you need to be 10x better. Leeds Fish Market is 10x better. I can get maybe 100 different specifies of fish and seafood there. So I go. Just like Amazon offered way more books than my bookstore.

Summary

Traditional supermarkets have a huge advantage over online ones because they have a far better distribution network. This is important because that is all a supermarket essentially is: they buy other people’s food and distribute it to people before it goes off. If the online world wants to compete, it needs to offer an experience that is so much better you cannot possibly not switch. Ocado and Amazon Fresh do not yet do that, in my opinion.

Comments
Free newsletter

Don't have time to check my blog? Get a weekly email with all the new posts. This is my personal blog, so obviously it is 100% spam free.

Metadata

Tags: , , ,

This entry was posted on Thursday, May 25th, 2017 at 11:00 am and is filed under Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.