Coles is going to start using Ocado's brainy warehouse robots to help it get an edge over Woolworths

OcadoOcado’s warehouse packing robots.
  • Coles will gain access to Ocado’s robots, as well as its online grocery platform, automated single-pick fulfilment technology, and home-delivery solutions.
  • The move could give Coles an edge of arch rival Woolworths.
  • Coles managing director Steven Cain said the deal will help Coles boost its online sales by about $1 billion.

Coles aims to steal leadership of the $3 billion online grocery market from arch rival Woolworths, entering into a long-term deal with leading British online food retailer Ocado.

Under the agreement, which was announced on Tuesday after more than 18 months of negotiations, Coles will launch a new website and build two highly automated fulfilment centres in Melbourne and Sydney at a cost of as much as $150 million.

The centres, which will each have about 1000 robots moving orders around, are expected to start operating in four years. Each will be able to handle products worth between $500 million and $750 million a year.

Ocado, an online food retailer which is transforming itself into a global digital technology company, will install and maintain equipment in the fulfilment centres and provide Coles with its smart platform technology, including an online grocery platform, automated single-pick fulfilment technology and home-delivery solutions.

Coles managing director Steven Cain expects the partnership with Ocado to boost Coles’ online sales by about $1 billion, double its home-delivery capacity and lead to improved profit margins for Coles Online, which barely breaks even.

“The reason we entered this deal with Ocado – at the half-year results we said that whilst Coles Online was growing fast at about 30 per cent and about to break even for the first time, the growth was diluting our overall margin and we would be looking for technology and automation solutions to improve efficiency and drive profitability,” Mr Cain told The Australian Financial Review.

“When we looked at doing this ourselves, we believed it would have taken longer and cost more money and there would have been a high degree of uncertainty that it worked as well as Ocado do now,” he said.

“We’re confident this will be a long-term relationship that’s rewarding for both companies.”

Analysts and investors welcomed the move, sending Coles shares up 2.2 per cent to $11.96 at Tuesday’s close.

“This is a positive strategic move for Coles, given their lag in digital
investment,” said Macquarie Equities analyst Rob Freeman. “But the competitive edge will remain to be seen.”

Coles Online generates annual sales of $1 billion and represents about 3 per cent of the retailer’s supermarket sales.

Market leader

Coles’ online business is slightly smaller than Woolworths’, which accounts for about 45 per cent of online grocery sales, but Mr Cain said that over time the partnership with Ocado would help Coles become market leader.

Both supermarket retailers have invested heavily in digital development and data to protect their market share as sales shift online and as Amazon ramps up its food and grocery offerings in Australia. However, those investments have dragged on margins.

Mr Cain said the Ocado partnership would enable Coles to deliver a best-in-class customer experience underpinned by a wider range, improved product availability and freshness, better pick accuracy, a significantly enhanced online capability at a lower cost to serve, and more regular delivery windows.

Coles currently picks online orders from its 1000-odd supermarkets and a handful of “dark” stores. It uses its own fleet of about 650 drivers to deliver online orders. Customers can also collect online orders from more than 1000 supermarkets and Coles Express stores.

Quinn Rooney/Getty Images

When the fulfilment centres are built, Coles expects productivity to improve five-fold and delivery times and costs to fall.

The additional capital expenditure is in addition to the $950 million Coles will spend over the next five years building two automated distribution centres to replace five warehouses.

But Mr Cain said the extra capex would not affect Coles’ guidance to distribute 80 to 90 per cent of profits as dividends this year.

“We would have been investing in advancing our online offer in any event, so some of this is substitute capex – we believe it’s the best way to spend our money,” he said.

While the terms of the deal were not disclosed, it is understood Coles will pay ongoing royalties or fees to Ocado based on its usage of Ocado’s operating modules.

“From a modelling perspective, I’d be working on $1 billion of extra sales at a margin between zero and 4 per cent in terms of a range of outcomes,” Mr Cain told analysts.

Ocado chief executive Tim Steiner said the agreement would reshape the food retail landscape in Australia by delivering a step-change in productivity.

He was confident Coles could achieve similar performance benchmarks in Australia as Ocado did overseas, including 99 per cent pick accuracy and 95 per cent on-time deliveries, despite lower population density.

The agreement comes a month after Ocado ended a long-term relationship with upmarket UK food retailer Waitrose in favour of an online grocery joint venture with Marks & Spencer.

Ocado is estimated to account for about 1.3 per cent of Britain’s total grocery market but almost 20 per cent of the online market, due mainly to its previous partnership with Waitrose.

Founded by three former Goldman Sachs bankers almost 20 years ago, Ocado struggled for years to make a profit but is turning around after striking deals with retailers such as Kroger in the United States and Casino in France and shifting from being a pure-play online retailer to technology provider.

Penetration low but growing

Australia’s online grocery penetration is about 3 per cent, compared with 7 to 8 per cent in the UK. According to IBISWorld, online grocery sales are expected to grow about 22 per cent to $3.3 billion this year – 10 times faster than sales in bricks-and-mortar grocery stores.

While online penetration in Australia is low, Roy Morgan research suggests more than five million Australians or 31 per cent of grocery buyers would consider buying groceries online in the next year.

“The market is there for the taking, however thus far consumers haven’t been convinced by the online grocery services on offer,” said Roy Morgan chief executive Michele Levine.

This article was originally published by the Australian Financial Review. Read the original here, or follow the AFR on on Facebook

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