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'Christmas slots went in five hours': how online supermarket Ocado became a lockdown winner

Harry Wallop
·18-min read

Ocado’s warehouse in Erith, 15 miles east of London on the Thames estuary, is staffed by 1,050 “personal shoppers”. Outnumbering them are 1,800 robots the size of small washing machines.

You see them by climbing to the top level of the vast warehouse – at 564,000 sq ft, it is more than three times the size of St Peter’s in Rome – where a sign tells you that photography is strictly prohibited. The online supermarket is paranoid that rivals will glimpse the technology it believes to be revolutionary.

From the viewing platform you can watch these metal cubes endlessly whiz around, moving thousands of plastic crates as if they were playing an enormous game of chess. You occasionally sight bottles of bleach or rosé, packets of noodles and dog biscuits, before they are sent down to a lower level.

“I find it quite mesmerising, like robotic ballet,” says Mel Smith, CEO of Ocado Retail, the UK arm of the business. “The day I decided I wanted this job was when I went to [the warehouse] and thought, this is absolutely the future.”

Smith is a plain-speaking, cheery New Zealander who joined just over a year ago from Marks & Spencer. She was hired in part to oversee the potentially tricky move of Ocado taking on M&S as its main supplier, after its longstanding relationship with Waitrose turned sour. The day I visit, it is just 48 hours after Ocado switched to M&S.

A floor below the robots, Elizabeth, a personal shopper, is standing at pick station number 29. Her average “each” time – Ocado jargon for individual products – is flashed up on a screen in front of her: 6.7 seconds, beating the target of seven seconds. This is how long it takes her to reach into the crate that has flown down a shaft from the floors above, take a product – in this case a bag of Cafédirect Machu Picchu ground coffee – scan its barcode and place it in one of Ocado’s distinctive grey plastic bags.

This is what makes the online retailer so different. If you place an order for a large shop from Tesco, Sainsbury’s or any of the other supermarkets, they will usually send a worker to walk along the aisles and pick your shopping in either an actual store or a so-called “dark store”, which caters exclusively to online shopping. Even if they are very quick, this is likely to take 20 minutes to half an hour. “There’s no way you can pick as quickly in store as here. Nothing like it,” says Simon Nottage, who runs the warehouse and is showing me around. He points to Elizabeth, who is now placing some cat litter into a bag: “This one station will do up to 400 ‘eaches’ an hour.”

The next item is a bag of Marks & Spencer Percy Pigs. “We’ve had a lot of those today,” Nottage says. In that first week of the switchover, Ocado distributed 150,000 packets of M&S’s famous sweets.

The switchover was expected to be the defining event for Ocado in 2020, until something cataclysmic happened. At 8.30pm on 23 March, Boris Johnson put the nation into lockdown. By 9.30pm that evening, Ocado thought it was suffering from a denial of service attack, when hackers try to disable a website by flooding it with traffic. “In that hour, we had over 800,000 authentications: that’s customers who put their username or password into the website to try and gain access to it – in one hour,” says Tim Steiner, Ocado’s chief executive and cofounder.

“We had built a business with lots of clever features and functionality over 20 years to attract people in,” Steiner says. “We never thought that we needed to have crowd control on the outside. We weren’t selling the latest Nike trainer or Glastonbury tickets.”

Back at the warehouse, Nottage, 49, seems unflappable, but admits that as the pandemic gathered pace in March, he became increasingly anxious. “Staff absences were huge at one point,” he says, with one in five workers off, because of either illness or shielding. Extra staff were rapidly hired to cope with Covid shortages and a surge in orders.

For a few weeks in March and early April, trying to secure an Ocado slot became a Covid rite of passage. Shoppers set their alarms for the middle of the night in the hope that they could grab a rare delivery, or sat in a virtual queue for more than seven hours to get their hands on milk, bread and other essentials. At one point, Ocado closed down the website for 48 hours; it suspended its app for five months for most of its customers; some still can’t access it. With a fresh outbreak of panic buying at the end of September, followed by the Welsh firebreak and, in November, a second English lockdown, slots have once again become harder to secure.

This time around, we’ve ditched any pretence of being virtuous. Alcohol is even bigger than it was during lockdown one

Lockdown changed everything – people who had only ever bought a book or some printer ink online suddenly needed to buy daily provisions over the internet. Smith says she watched with mounting fascination at how people’s shopping baskets changed. “My anthropological understanding of society has really shifted. First off, everyone went nuts for baked beans, tins, pasta, toilet paper. Then after that, everyone went virtuous, sort of Martha Stewart. There was a lot of yeast and home-baking stuff, educational stuff for the kids. Not long after there was a lot of alcohol and ice-cream. And then personal cleaning and grooming products, like deodorant and soap, fell off the cliff. I think people were staying at home and drinking a lot, and perhaps not adhering to their normal hygiene routines.”

Now that England is back in lockdown, sales of chocolate, puddings and alcohol have surged. “This time around, we’ve ditched any pretence of being virtuous. Alcohol is even bigger than it was during lockdown one. Beer sales in particular have spiked.” How about deodorant? “Personal hygiene has not improved. People are basically living at home in their sweatpants.”

Smith says Ocado’s Christmas slots, which usually take five days to be filled, were snapped up within five hours of being released in early October. “We released them at midnight and thousands of people stayed up to grab one.” Small turkeys – aimed at six people or fewer – have already sold out.

Despite turning away hundreds of thousands of customers, the demand for Ocado’s service has seen its existing, wealthy shoppers buying more, both for themselves and family members, with average orders climbing from £105 to £180 at one point. This was much more than the average online supermarket shop, which hit £87 during the pandemic, according to Kantar, the research company, and considerably more than the average supermarket shop, which was £25. The supermarket industry as a whole increased sales by 13.2% during the six months to 6 October. Ocado’s sales increased by 43.7%.

This increase has been dwarfed by the company’s share price rise. Shares have jumped by 121% since the start of the pandemic, and by the beginning of this month Ocado was worth £18bn, nearly as much as Tesco, Britain’s biggest retailer. A company that was once the butt of jokes about supplying only smug, middle-class Londoners with organic kale and harissa paste has become – along with Amazon, Netflix and Zoom – one of the global winners of Covid-19: a tech company promising to transform our lives and upend the established order.

“I don’t think we’ll go back to what we were doing before with supermarket shopping,” Smith says. “Because once you’ve seen the light, why would you ever get into the car to go to the supermarket?” Last year just one in five Britons did an online supermarket shop; it is now one in three. Online grocery shopping is here to stay.

There are some, however, who believe Ocado’s rise and astonishing valuation beggar belief. They say that its tortuous history, making a loss for 17 of its 20 years of operation, as well as its inability to handle a surge in new customers during the pandemic, means it can never become a serious rival to Tesco, let alone Britain’s answer to Amazon. Lockdown was its chance to prove the superiority of its robotic technology and win over hundreds of thousands of new customers, and to some extent, it blew it. More than that, the critics argue, online shopping is fundamentally an unprofitable business.

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The rise of Ocado is almost entirely down to one man: its chief executive Tim Steiner, 51, whom Smith, on more than one occasion, calls “a genius”. He has certainly been remunerated accordingly, paid £58.7m last year in salary and bonuses. A former banker, he has a reputation for being prickly. We speak over Google video call; he is in his Highgate home in London, wearing a grey T-shirt, with a scrupulously blank desk and unadorned wall. As he explains the company’s history, he does little to dissuade me that he has – as someone who used to work with him told me – “a mentality that the world and everyone is against him”, despite Ocado’s “20-year overnight success story”, as he calls it. He talks about “perennial detractors” who have always written the company off, analysts who “fail to understand” the magnitude of Ocado’s potential.

Steiner set up the company with two friends, all then in their late 20s and working for Goldman Sachs: Jason Gissing, 50, and Jonathan Faiman, 51, Steiner’s friend from nursery school. “It was the first dotcom boom,” Steiner says. “Starting a business and scaling up was kind of the rage.”

The business was founded in 2000 and called Last Mile Solutions (LMS). The idea was that it would team up with a supermarket chain and deliver their products to people’s homes – from a central warehouse using lots of technology. But they did not have a supermarket partner. Both Tesco and Sainsbury’s had already dipped their toes into online retailing, which left LMS with few options. “Waitrose approached us. In fact, it was Charlie Mayfield who called me,” Gissing recalls. “At the time he was working for the development director at John Lewis.” Mayfield, as Sir Charlie, would go on to become chairman of the John Lewis partnership.

We were constantly fighting with John Lewis and Waitrose. It was like being in an abusive marriage at times

“John Lewis had a reputation at the time for being very conservative and not very dynamic,” Gissing says. But the company was keen to expand its Waitrose brand and wasn’t big enough to go it alone; it invested £35m in the business in return for a 40% stake. It cashed in the last of its stake in 2011, making a £220m profit, which seemed lucrative at the time. Had it held on to its original shareholding, it would now be worth around £7bn.

By the time the company started delivering food to customers in 2002, it had changed its name. A branding company presented the trio with a list of 100 options. “There were names such as Bean Runner and Fruit Passion,” Gissing recalls. “Ocado was on there because it sounded a bit like avocado and was easy to spell. I said: ‘I like that one.’ And Tim said he liked it, too.”

Ocado soon established itself as the quinoa classes’ supermarket of choice, helped by its policy of hiring polite delivery drivers who would unpack your shopping for you, if asked. Money was thrown at good customer service, too. With your fifth shop, you received a free bottle of champagne; any broken items were refunded and a voucher given as an apology. “I used to joke that it cost several million quid per delivery,” Gissing says. “Because we’d raised all this money, but made very few deliveries.”

At the time the company floated on the stock market in 2010, it had never made a profit, though it was delivering around 80,000 orders a week. Philip Dorgan, then an analyst at the broker Ambrian Partners, memorably quipped: “Ocado begins with an ‘o’, ends with an ‘o’ and is worth zero.” Sir Terry Leahy, then chief executive of Tesco, dismissed it as a “charity”.

To make matters worse, Faiman quit the company and would later fall out spectacularly with his cofounders after setting up a rival. There was an increasingly ill-tempered legal dispute, with mud thrown very publicly from both sides. Steiner refuses to talk about it, perhaps because the dispute is not fully resolved, but at one point when discussing how the three of them started the venture, he says “my friends”, before pointedly correcting himself and saying “my then friends”.

As the losses continued to mount, John Lewis and Waitrose started to lose patience. Gissing says: “We were constantly fighting with John Lewis and Waitrose. It was like being in an abusive marriage at times.” The turning point was in 2013, when Ocado went behind Waitrose’s back and struck a deal with Morrisons – to supply warehouse technology and software to the Yorkshire supermarket.

Waitrose was livid. From that moment the relationship between the two was irretrievable. But to Ocado the Morrisons deal was a godsend, not just raising more money, but also proving to its critics that other supermarkets were willing to pay good money for its knowhow and technology. Dorgan, the man who had written them off, says: “It removed any doubt that they could survive. It gave them credibility.”

In the last few years, Ocado has struck deals with, among others, Casino in France, Sobeys in Canada and Kroger, the second largest supermarket in the US. These chains pay Ocado a licence fee for its robots and its software. At the moment this licensing revenue makes up less than 1% of Ocado’s total turnover, but that’s because most of these deals are at very early stages. Many of the warehouses are still being built, the robots yet to start whizzing around.

For now, most of Ocado’s turnover comes from Ocado Retail – the vans delivering milk, hummus and ready meals to customers in England and Wales (it doesn’t stretch farther north than Sunderland). Confusingly, this UK business, run by Mel Smith, was split off last year into a separate joint venture, 50% owned by Marks & Spencer – an arrangement it struck after the relationship with Waitrose collapsed. Steiner’s hope is that, over time, the UK joint venture will become a relatively small part of the total business, because the overseas licensing revenue will grow and grow. It will stop being a UK online supermarket and become a global technology giant.

Earlier this month, Ocado spent $287m (£216m) buying two US robotics companies to help speed up automation in its warehouses – a move that boosted its share price, before news of Pfizer’s vaccine breakthrough sent it back down.

“We’ve been investing in the future of distribution of groceries,” Steiner says. “And it is a £7.8tn market.” Yes, that’s trillion. Considering that Ocado charges overseas grocery chains a fee equating to about 5% of turnover, you can see why many people think it has hit the jackpot. The company would be taking a small slice of people’s weekly shop from Romford to Rio de Janeiro.

Crucially, online shopping is quick. Smith reckons the average Ocado shopper spends just 14.6 minutes doing their online shop, compared with well over an hour driving to and pushing a trolley around a traditional supermarket. But does that swiftness remove something from the shopping experience? Not many consumers would want to return to the 1950s, when food shopping required a separate trip to the baker, the butcher and the greengrocer; but when Ocado and other online food shops allow you to buy exactly the same order as last week with the click of a button, do we end up boxed into algorithm-designed consumer stereotypes – destined always to have chicken kiev on a Monday and mushroom risotto on a Tuesday?

It will be like Comet, Currys, Woolworths. Not every supermarket will disappear. But there will be a dramatic shift

“My view is that 70% or 80% of what people put in their basket is something they habitually do,” Smith says. “Something we need to do – and we are redesigning our website further – is to try to put more inspiration in your way, so you can buy something you’ve not seen before.” Ocado has an astonishing 58,000 items on its website – more than double what you could find in the very largest hypermarket – but how many of those do most customers ever buy? The site frequently flashes special offers on the screen or makes “recommendations” of new items.

“But shoppers’ attention span online is quite short,” Smith admits. “They tend to only look at the first four things and if you’re not – as a supplier – in the search algorithm for the first four things, you don’t make it into the basket.” Supermarkets were once the gateway to a world of exotic ingredients and innovative products for the Delia Smith generation. Online grocery stores are unlikely to fully replicate that.

Online shoppers have always been wealthier than average – the high minimum spend and delivery charges, coupled with the need to have access to broadband, mean not just Ocado, but also Tesco and Morrisons online have always appealed to customers with larger wallets.

The winter lockdowns have only cemented this trend, according to Ocado. “Our most premium customers have four orders booked in advance,” Smith says. “They are obviously nervous about securing an order, so they have forward-planned – you would never have seen this a year ago.” To secure these deliveries, you need to put at least £40 worth of goods in each of your online baskets. And it is often filled with a single bottle of expensive champagne as a holding item – not always removed before the shop is completed.

“Our aim is to be more accessible to a broader range of the population over time,” Smith says. For now, that will have to remain an ambition. Ocado’s customer base has not changed this year for the simple reason that it did not have the capacity to take on new customers.

This sits at the heart of the Ocado conundrum. Its warehouses were already running at full capacity before Covid, processing a maximum of 450,000 orders a week. While Tesco could cope with a surge in demand by hiring (at some expense) thousands of new workers to go around supermarkets “picking” customers’ orders, Ocado could not. It needs to build new warehouses, which is a cumbersome process. The business was already in the process of expanding, taking its capacity to 655,000 orders, but this will take another 18 months.

Critics of Ocado argue that it will always be more expensive for any retailer to deliver groceries to your front door than for you to get into your car and do your own shopping. The most profit Ocado has ever made was back in 2016, when it totalled £12m on turnover of £1.27bn. That’s just 1p profit for every £1 of washing powder or hummus sold. Tesco makes more than 4p per £1 in the UK.

Steiner argues the economics were – for nearly a century – stacked in Tesco’s favour: it owned the supermarkets, from which it delivers its online groceries. Ocado had to build its warehouses from scratch. “If you and I were playing Monopoly, but I started out already owning half the sites on the board, with hotels on all of them, you could be Bill Gates or Larry Page or Jeff Bezos in intelligence, but you’re not going to win. Until someone changes the rules, you can’t win a game.”

He argues the rules have changed – because he has changed them. Ocado’s warehouses are now profitable. And it won’t be long before it is cheaper for the robots, rather than you, to do your shopping. What then? Ocado remains a minnow compared with Tesco, in terms of how many customers it has, controlling just 1.7% of the UK grocery market compared with Tesco’s 27%. But Steiner believes there will come a time when the big, legacy supermarkets will go the way of so many high street fishmongers, bakers and greengrocers.

Related: Supermarket deliveries: how UK services stack up for price and choice

Only a few more of us need to ditch our cars and start shopping online, and “that would destroy the profitability of most supermarket groups in the UK”, Steiner argues, with a blase ruthlessness born of nearly two decades of critics sniping about Ocado’s viability. Now it’s his turn to dismiss them.

“It will be like Comet, Currys, Woolworths. Someone will go first. Not every store will disappear, but there will be a dramatic shift. As stores have to fight it out, and they deteriorate their service to try to be economical, they have fewer staff, the stock starts to look more tired, it’s not as fresh as it was – you can see an acceleration of channel shift.”

He believes the online supermarkets, headed by Ocado, will be ready and waiting to take over. It seems outlandish. But so, too, was the idea that Tesco could ever become Britain’s biggest supermarket, or that Woolworths could disappear from our high streets. The British consumer is fickle, and never more so than now.