Ocado turns to Carrefour as online competition hots up

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Ocado has entered into a supply partnership with Carrefour Group to trial the Reflets de France range of French produce. The online grocer is committed to a massive expansion in its fulfilment facilities, but is facing increasing competition – notably from its main supplier, Waitrose.

Chief executive Tim Steiner said the deal was “an important development in our strategy to offer the broadest and most diverse grocery range to all our customers in the UK”.

Ocado will be trialling the Reflets de France range to all customers across the UK from 14th July.

It has expanded the capacity at its customer fulfilment centre (CFC1) to deliver 124,000 orders per week during peak times, and it plans to invest a further £80 million over the next 18 months to in increase the site capacity to 180,000 orders per week.

The company also opened a new spoke in Bristol during the first half of the financial year, which expanded coverage of the service by over one million households in the South West of England and South Wales.

Another new spoke was opened in Wimbledon just after the half year which increased capacity in the London area by 23 per cent.

Historically, Ocado has had a very close relationship with the John Lewis mPartnership which owns Waitrose – and still has a long term supply deal with the retailer.

But, in February, the John Lewis pension fund sold its stake in Ocado. And April, Waitrose revealed that it was converting one of its existing warehouses in West London into a dark store to further its online shopping expansion plans.

Ocado increased EBITDA by 79 per cent to £14.3 million during the first half of its financial year to 15th May.

Distribution costs increased by 16.4 per cent to £68.3 million during the period, which was slower than sales growth. Consequently, distribution costs as a percentage of sales fell from 23.9 per cent to 23.0 per cent.

The two major components of distribution costs are the customer fulfilment centre and trunking and delivery costs.

CFC costs increased by 18.1 per cent. Variable CFC costs increased faster than revenue due to the need for additional staff to provide a short-term increase in capacity.

However, the operating leverage of the fixed cost base on increased volume meant that total CFC costs continued to fall as a percentage of revenue.

Trunking and delivery costs increased by 14.2 per cent, with productivity gains offsetting inflationary pressures.

Administrative expenses increased by 19.4 per cent to £19.8 million. The main drivers of these cost increases were additional employment costs and associated infrastructure, including the additional costs of being a public listed company.

During the first half of 2011 the company hired additional temporary staff for CFC1 to provide a short-term increase in capacity in some areas such as trolley picking.

As a result, CFC1 efficiency, measured in units per hour (UPH), decreased by seven per cent to 114 UPH.

As capital expenditure becomes operational in CFC1 over the next 18 months, Ocado expects productivity to rise; its target is 180 UPH.

The company said that operating close to its current capacity at CFC1 has contributed to a slight decline in the accuracy of its service to 98 per cent. It anticipates returning to 99 per cent accuracy once the capacity increases have been completed.

Ocado is currently constructing its second fulfilment centre at Dordon, Warwickshire at a cost of £22.3 million, which it expects to be operational at the end of 2012.

The company also claims to have boosted delivery efficiency by increasing the scale of the business, combined with upgrades to its routeing software and vans, which has improved the number of drops per van per week by eight per cent to 142.

In the most productive week of H1 2011 Ocado achieved 165 drops per van per week. It’s long-term target is to achieve 175 drops per van per week.

However, on-time delivery performance has decreased to 92.7 per cent from 94.9 per cent, which the company puts down to the capacity constraints of its fulfilment centre.

It expects the increased capacity that it is installing to drive this back up.

As well as entering into the partnership with Carrefour, Ocado has expanded its own-brand product range to 350 items during the 24 weeks to 15th May 2011, an increase of 100 during the period.

It has also expanded its Tesco price match to approximately 7,400 products.

Ocado’s Webshop, which was launched in November 2010, has reportedly enabled customers to shop 25 per cent faster than before.

Checkouts via mobile devices grew to 15 per cent of all checkouts – up 150 per cent during the same period in 2010.

Ocado is also set to expand its non-food offering and has signed a lease on a 100,000 sq ft warehouse to fulfil this business.


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