Ecommerce, Marketplaces & Classifieds: Company presentation by Stewart McGuire, Head of Corp. Dev. at Ocado at the NOAH Conference 2019 in Tel Aviv, Hangar 11, 10-11 April 2019.

1. Structural changes within the
global food chain
NOAH Conference
April 10 2019
Stewart McGuire

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3. Traditional grocery retail model
• Grocers are mainly real estate and logistics organisations:
• Tesco owns ~50% of its UK stores but still pays >£1bn/year in rent
• Tesco is the largest private employer in the UK
• Grocers pay ~4% of sales for its DC functions
• A difficult business: profit margins are notoriously thin (~3%)
• Differentiation is difficult
• But they enjoy free picking and free delivery!

4. Online grocery – value destroyer
• Online grocery serves up a set of fiendishly difficult logistics problems:
• Low value per item
• Huge basket size of independent, unrelated items (~45 per order)
• Substitutions
• Stock-outs
• Packing problems
• Three different product temperatures
• Customer-chosen slots with an extremely narrow window
• Low drop density
• World’s worst “.com” disaster: Webvan (2001)

5. Brexit: Bringing the UK together
• COGS will rise, due to tariffs, lower sterling,
regulatory costs, longer supply chains and
higher labour costs for suppliers
• “…retailers will experience a material shift
upward in their cost structures, from +2.3%
of UK sales under a soft Brexit scenario to
+5.6% of UK sales under a hard Brexit
scenario…” (source: Credit Suisse)
• Highlights the issues around availability, and
more importantly, food security for a nation

6. UK supplier coping strategies
• Replace supply with greater
domestic production or non-EU
imports
• Difficult… the UK’s self-sufficiency
in food has been decreasing over
the past 30 years
• Non-EU suppliers may not have the
capacity or quality characteristics
needed to backfill supply
• How many countries have 100%
domestic supply security?
UK Production to Supply Ratio

7. Lots of food is shipped long-haul
• Bulks – rice, flour, other grains plus items like wine, etc.
• Refrigerated containers (“Reefers”) are already 7% of total container volume!
• Bananas, pears, cherries, flowers, juice, etc., etc.
• Takes 18 days to ship grapes from Peru to US
Global Refrigerated
Seaborne Trade
Source:
Drewry, WSJ
Bananas
Inside a
“Reefer”

8. Competing consumer trends
• Consumers demand variety and availability without seasonality (easy to identify)
and quality (which is harder to judge)
• Consumers do not want to think they are contributing to:
• Climate change
• Deforestation
• Mega-farm environmental impacts
• Poor animal welfare
• Labour exploitation
• Water overuse
• Pesticide use
• Waste
• Globalisation of food production is at odds with current consumer trends

9. Technological trends
• The issues raised by food security, globalisation of the food supply, consumer
demands and regulatory requirements will require changes to ‘business as
usual’
• Two areas to highlight:
1. A change to the retail model … centralisation / online
2. A change to the production model … vertical farming

10. 1. Centralisation of retail
• Centralisation only works in an online / delivery model
• Key elements of a profitable online vs. offline grocery model:
• Removing costs – real estate, labour, waste
• Improving service levels – assortment, accuracy, in-stock position
• Increasing efficiency – automation
• Ocado’s CFC in Erith (near London) has capacity of £1.2bn (= 30x Tesco Extra
stores, which average 7,000m2)
• Key benefit for suppliers / farmers: a centralised facility enables small / niche
suppliers to have national reach(1)
(1) For example, Tesco has 3,440 outlets in the UK, of which 732 are supermarkets as of August 2018

11. 2. Vertical / controlled environment farming
• The reduction in cost and rising efficiency of LED lights has led to an explosion
of start-ups in the sector (but not yet cost competitive)
• Plants bred for taste / freshness, not for pest resistance / hardiness
• Picked when ripe, not ripened in transport
• Very low water use (~97% less)
• Multiple cycles, no seasonality
• Localised – very few food miles
• Better than organic?
• Just in time / demand matched – lower waste
• Can (will!) use ML / AI
• Extreme density – co-located next to CFCs!

12. Conclusions
• Distribution channels and consumer demands are shifting:
• If you are a store, worry
• If you send commodity products 1000s of miles to customers, worry
• If you have production or growing expertise:
• Technology will help you produce and sell globally regardless of your size
• You will have the ability to bypass the middle-man
• Food security will be achievable by virtually anyone
• The future of food is hugely exciting