Yahoo Finance Ocado hopes Christmas delivers in wake of warehouse fire chaos
A three-day long blaze battled by 15 fire engines would have been enough to send many executives' business dreams up in smoke - but Ocado boss Tim Steiner is not known for a lack of confidence.
When the company's flagship robotic grocery warehouse in Andover was all but razed to the ground two years ago, he went back to the drawing board and started on a new design.
Now, armed with a fresh generation of less flammable robots, Ocado is gearing up to beat its rivals in the first post-Covid Christmas.
“The way this latest fire started was only possible with the old robots,” Steiner says. “With the new robots, nothing would have happened.”
The Andover fire in 2019 destroyed 10pc of Ocado's overall capacity and raised wider questions about the future of the company, which has been seeking to sell its technology to supermarkets all over the world as they grapple with the challenges of the digital age.
Nor was it then end of the company's problems. Another fire broke out later that year in a container for waste packaging, and then this July, a blaze took hold at Ocado's depot in Erith, south-east London.
Steiner is keen to stress that the latest problem - which is expected to dent the online grocer's full-year profits after costing it £35m in lost sales, equivalent to 300,000 customer orders - is now under control.
Caused by the collision of automated robots, the Erith fire only damaged less than 1pc of the warehouse’s systems.
“Everyone is reassured that the lessons of Andover were well learnt, that Erith was well contained and that we can eliminate what caused the Erith fire to never happen again,” Steiner says.
He says that Ocado’s international partners - including retail groups Casino in France and Kroger in the US - are “very reassured” by the work it is doing on its updated, safer robot designs. The company stopped shipping old robots to customers this year.
“There was a massive difference between the [Andover and Erith] fires. We obviously learned a lot from Andover,” Steiner says.
“As a result the fire at Erith was very contained and did a limited amount of damage. We’re making some physical changes to the robots to eliminate the potential for a similar event to occur.”
Ocado is seeking to generate more light than heat for investors this winter as the company gears up for a busy Christmas.
Steiner expects festive delivery slots to sell out weeks in advance, benefitting from its 50-50 joint venture with retailer Marks & Spencer.
However, industry observers have noted that the kind of operational problems it has suffered are something the business can ill afford.
“There was a greater impact than expected from purging stock, building stock up again and then ramping up capacity. The Erith depot is also still running at slower rates - robots at a slower speed and greater space around them - leading to reduced capacity,” says William Woods, a retail analyst at Bernstein.
The firm is also retrofitting some of its robots in Erith, which will take until November to operate at 100pc capacity, and for its international clients.
On Tuesday Ocado announced that revenue fell 10.6pc to £517.5m in its third quarter, while sales grew by 19.8pc in the previous six months. Business for the grocer boomed when lockdowns were imposed, sending its share price up as much as around 120pc to a pandemic peak in September 2020.
Following the update, analysts at Royal Bank of Canada said sales were softer than expected for the 13 weeks to August 29 and lowered their forecasts for underlying profits for this year by 20pc to £61m. Shares in Ocado dropped 5pc in early morning trading before later recouping some losses.
They said: “Ocado is the only global provider of an end-to-end online grocery solution, which we view as the most robust and profitable. However, inability to scale rapidly means the group is unable to fully capture the available market demand for both Ocado retail and its partners, while the pace of depot openings continue to be constrained.”
Beyond the robot crash at Erith, Ocado also has to contend with a return to pre-pandemic shopping behavior after a dramatic shift to internet orders when the crisis hit last year.
Juliet Cuell, a retail analyst at GlobalData, says: “It is evident that the pandemic has had a lasting impact on the way consumers shop for food and grocery, with many continuing to shop online. However, some shoppers are returning to physical stores, apparent by Ocado reporting smaller average basket sizes.”
Cuell added that Ocado should promote its smart pass service, which does not charge members for delivery, to encourage consumers to place smaller top-up shops online. The firm has already launched a marketing blitz in recent months to draw more shoppers to its platform.
Nevertheless, Steiner’s confidence in the online supermarket’s ability to perform well during the winter months partly stems from the fact that it achieved record customer acquisition levels of 64,000 new users in the third quarter, hitting a total of 805,000. It has also held onto its market share gains that boomed during the pandemic, though it still only accounts for about 2pc of the total UK grocery market.
In the lead up to the peak Christmas period, and to capture more of its rivals’ shoppers, Ocado is bringing additional capacity on board at Purfleet in Essex - 85,000 orders per week - and Andover - 60,000 orders per week.
The grocer expects its Erith distribution centre to be running at maximum capacity in time for the busy run-up to Christmas.
Ocado also announced a new depot in Luton in addition to Biscester, which will be launched by 2023. The company is seeking to fulfil 700,000 orders per week in the next two years, up from around 250,000 in the early days of the pandemic.
Steiner said Ocado’s Christmas preparations would not be directly affected by the recent shortage of lorry drivers either, as it was always oversubscribed with drivers seeking to make deliveries during the period.
As the dust settles and a ‘new normal’ of consumer behaviour starts to emerge, retailers will need to look again at how they service online orders in time for the so-called golden quarter.
