by Martin Veitch

Ocado and the complex web of online shopping history

Jul 12, 2010
IT Strategy

For some years now, the supermarkets and grocers have provided a useful Greek chorus commentary on the development of e-commerce, providing insights as to what works, the growth curve of the web, mainstream acceptance, distribution, fulfilment and much else.

Some of the events in the sector have been totemic. Think, for instance, of Webvan, the Californian startup that burned through $1bn in five years without achieving profitability, thereby teaching a salutary lesson in the risks of specialist dot-com operations build-out.

Then compare and contrast with Tesco’s spartan early online operations where orders would be printed out and picked in stores and rough-and-ready substitutions were common. Now, jump forward and consider some of today’s clever hybrid models such as Waitrose’s offer for customers to buy online and collect in stores rather than setting aside windows of time for deliveries to take place.

And finally, think about Ocado, the online groceries service that plans a float that will give it a £1bn valuation. That large, round number has given observers plenty to chew on, especially as the company is yet to make a real profit and has annual revenue of less than half its supposed valuation. It is also being hammered by pundits who note that its exclusive ability to deliver Waitrose products in the London area is due to run out in this decade or just into the next. Worryingly for Ocado, Waitrose’s online site is called Waitrose Deliver…

These are significant caveats but Ocado also has a lot going for it. Its bold decision to build a state-of-the-art central warehouse and logistics base for the south in Hertfordshire has proven a wise move and part of the reason for the float is to do the same for the north, which is almost virgin territory for the company. Also, its trajectory is upwards, execution has been impressive and, as I and many others who have shopped around online can attest, Ocado has gorgeous service with terrific drivers who can’t do too much for you. Finally, its move to offer shares to customers is a notably smooth piece of customer marketing.

Against that of course, Tesco might be cheap and huge, Sainsbury’s might have a better brand and Waitrose – its partner, for now at least — might be the posh choice. The sceptics are surely right to harbour deep reservations about Ocado’s sense of self-worth and I won’t be betting the children’s future on its shares scaling a luminous summit. But its appeal has crept up on me and many others who don’t want shopping hassles added to the weekly toll of domestic drudgery and misery. That emotional appeal should not be underestimated and might represent a large part of the market valuation in a sector that is still sorting itself out. So, with lessons still being learned in online shopping, I’m not betting against it.