Introduction

Ocado has evolved from an e-commerce grocery retailer to a technology company that develops innovative approaches to warehouse automation. It has sold its technology to grocery retailers such as Kroger in the US, Sobeys in Canada, Groupe Casino in France and ICA in Sweden.

This report illustrates the company’s transformation into a technology provider and gives an overview of how the company’s robotics distribution centers and the suite that supports e-commerce distribution—Customer  Fulfillment Centers (CFC) in Andover, UK, and Ocado Smart Platform (OSP) respectively—work.

Ocado’s Journey from Grocery Retailer to Technology Vendor

Founded as an online-only supermarket in April 2000 by former investment bankers Jonathan Faiman, Jason Gissing and Tim Steiner, Ocado has made a name for itself in recent years as a technology company with expertise in warehouse automation.

The company’s success in transforming its own online grocery business was a process that required in-house research and development of proprietary robots, machinery and software. Ocado now licenses the use of its warehouse automation technology to third-party retailers.

Figure 1 is a timeline of the key events of Ocado as a technology company.

Source: Ocado Technology/Coresight Research

Ocado’s technology business already generates an additional stream of revenue and profits. Ocado’s valuation rests in part on that technology increasing its contribution in the long run as the company inks deals with more retailers. Though the company’s e-commerce business is currently a more profitable business, Ocado Technology is growing at faster rate, as shown in Figure 2.

Data are for the fiscal year ended December 3, 2017. Retail includes online groceries and general merchandise offerings to customers in the UK; Solutions includes end-to-end online retail solutions provided to corporate customers in the UK and internationally.
Source: Company reports/Coresight Research

Diversification should help mitigate Ocado’s relative lack of scale: as we show below, Ocado has a UK grocery market share of just over 1%.

Source: Kantar Worldpanel

Ocado is planning to expand the scope of its logistics management technology beyond grocery e-commerce to cover other sectors such as automotive and transportation, which will soon see the entry of autonomous vehicles.

Ocado’s Robot-Staffed Distribution Centers

At CFC3 in Andover, UK, Ocado has developed a new approach to warehousing automation, shifting from a system based on conveyor belts (in operation in other Ocado sites, including Hatfield, UK) to one centered around a dense 3D-grid—dubbed the Hive—in which layers of crates

containing grocery products are stacked. Swarms of robots—which communicate with each other using a proprietary 4G-based protocol—move across the grid to collect crates and take them to picking stations where (human) employees pick the individual items needed to fill customer orders. The proprietary 4G technology used at CFC3allows connections with a frequency of ten times per second with the 1,000+ robots moving around the warehouse and working within a 150 meter radius, according to Ocado Technology.

The advantages that the Hive’s system has over the traditional warehouse structure (based on conveyer belts) include easier scalability, and reduction in both the warehouse space required and average time taken fill customers’ orders. Ocado Technology says that the Hive’s system can “pick”a grocery item every six seconds and fill a 50-item order in around five minutes.

Source: Ocado Technology

Robotic Arm and Collaborative Robot

Ocado is continuing with its research and development to improve the logistics of grocery e-commerce. The company is carrying out high-profile research projects, including SoMa and SecondHands, which are a soft manipulation system and a robot assistant, respectively. The SoMa project is a European Union-funded, Horizon 2020 programme for research and innovation in the field of humanoid robots, and the Ocado’s partners in the SecondHands project are four eminent institutions: Karlsruhe Institute of Technology, which is building the robot; University College London, which is providing the robot’s vision system; Sapienza Università di Roma, which is supplying the actual intelligence for the system; and Ecole Polytechnique Fédérale de Lausanne, which is providing the robot with bi manual manipulation.

Ocado Technology has also been developing a robotic arm capable of picking up the 50,000+ items that feature in the company’s online catalog. The arm is equipped with a pipe running to an air compressor, which is capable of lifting items regardless of their deformability and shape, as long as they are within the weight restriction and the suction cup at its end can create an airtight seal with the item’s surface if it has a big enough surface available and is not porous (Figure 5).

Source: Ocado Technology

The arm is designed to integrate with OSP and can move items from the storage crates into the delivery crates. It is run by artificial intelligence (AI), computer vision and sensors that enable it to have an understanding of where the crates are, where the items to be picked are located inside the crate, and in what order and where to put the picked items inside the delivery crates.

The suction system does away with the need of remodeling the items in order to make them manageable by the robot arm, and allows the technology to be potentially scaleable and applicable to a variety of enviroments where items need to be handled.

Ocado has also been developing the prototype of a collaborative robot called ARMAR-6, which will be able to someday work alongside humans in warehouses. For example, if it observes a technician attempting to change a panel and requiring a set of tools, it will come and offer its assistance—either by holding the panel for the engineer or grabbing the various tools that are needed.ARMAR-6 will use AI and machine learning (ML) and will also have a speech recognition system.                                                      

OSP: Ocado’s Proprietary Solution for Operating Online Retail Businesses

OSP is a suite for the management of e-commerce logistics operations that includes and integrates automated warehousing and software applications. The platform enables retailers to apply Ocado’s logistics and fulfillment expertise to their e-commerce operations.

OSP comprises the following three components:

1. E-commerce and app: Platforms tailored to the partners’ requirements, and include a website content management system and and the algorithms to enable personalized customer reccommendations and other features.
2. CFC: Ocado’s proprietary mechanical equipment and software installed in the client’s warehouse to run logistics. The equipment is serviced and maintained by Ocado.
3. Last mile software: To run operations including home delivery and click-and-collect services.

Aside from the robots and 4G technology used to operate the Hive in CFC3, the OSP operates through a combination of technologies including big data, cloud computing, AI, ML and the Internet of Things (IoT), to perform predictive analytics, process orders, optimize operations and to manage the operational complexity of the system in a efficient way. Figure 6 illustrates how the key OSP components work together.

Source: Ocado Technology

By using OSP, retailers are effectively outsourcing to Ocado their grocery e-commerce distribution, leveraging the experience of the company, benefiting from the flexibility and scaleability of the platform, and forgoing the costs that the development of their own fulfillment structure would have entailed. The downside, however, would be for partner retailers using Ocado’s platform to retain less control over their supply chain and becoming reliant on a third party provider for their logistics operations.

Key Takeaways

Operating as a technology provider enables Ocado to diversify in terms of industries in which it operates, as the technology developed by the company will also be transferable to partners operating in industries beyond retailing.

In running its core grocery e-commerce operations using the technology developed in-house, Ocado is also able to collect large amounts of shopper data which will prove to be invaluable in the future when the adoption of smart-home technologies increases and starts reshaping grocery retailing.

Ocado’s proprietary technology, in particular its automated warehouse technology, is redesigning grocery e-commerce warehousing, making it more efficient. Retailers partnering with Ocado for the use of its technology take advantage of this innovative system without the research and development (R&D) investment that would have been required for the development of their own in-house technology.

 

Source: Company reports/Coresight Research

Fiscal 1Q19 Results

Estée Lauder reported fiscal 1Q19 revenues of $3.52 billion, up 7.6% year over year and higher than the consensus estimate of $3.47 billion. Adjusted earnings per share (EPS) was $1.41, higher than the consensus estimate of $1.22 and higher than EPS of $1.21 in the year ago period. The company reported that comparable sales were up 11% overall in the period, which made it the sixth consecutive quarter of double-digit sales increases.

Segment Update: Skin Care Increasing in Nearly Every Channel

By segment, net sales in Skin Care grew by 16.5%, from $1.28 billion to $1.49 billion on a reported basis. The company reported that Skin Care grew in nearly every channel and segment, and experienced particularly strong growth in Asia, travel retail and online. The segment saw growth in La Mer (Estée Lauder’s luxury skin care brand) with net sales increasing in every region and channel, driven by higher net sales of both existing and new products, which includes The Treatment Lotion Hydrating Mask. Estée Lauder also launched the Advanced Night Repair Eye Supercharged Complex, which also contributed to overall sales in Skin Care during the quarter.

The Makeup segment’s net sales increased by 2% on a reported basis, from $1.37 billion to $1.41 billion, driven by increases in MAC, Estée Lauder and Tom Ford Beauty. Estée Lauder’s Double Wear line of products drove double-digit growth, as did Tom Ford’s lip- and eye-shadow lines. These increases were offset by lower net sales of Clinique and Smashbox makeup sales.

Net sales in the Fragrance segment decreased by 1% on a reported basis, from $476 million to $472 million, driven by the adoption of the new accounting standard, ASC 606; excluding the adoption of ASC 606, the fragrance segment saw increased net sales in Tom Ford Beauty, Le Labo, By Kilian and Jo Malone London, and growth in “Private Blend” fragrances including the launch of Tom Ford’s Ombre Leather and the extended reach of Jo Malone with the launch of the fragrance on Tmall in China.

Net sales in the Hair Care segment increased by 5.1% on a reported basis, from $136 million to $143 million due to growth from Aveda’s Invati Advanced product line and the launch of Cherry Almond Softening Shampoo and Conditioner.

Geography Update: Strongest Growth in APAC

By geography, APAC led net sales, growing by 24% on a reported basis. The company highlighted that sales in China and Hong Kong rose in strong double digits with broad-based growth across brands, categories and channels, and prestige beauty growth and department stores continued to grow more than 20%, and online sales more than doubled.

The company reported that net sales in Europe, the Middle-East region and Africa rose 14% on a reported basis, driven by strong double-digit increases in the global travel retail business and emerging markets.

Net sales in the Americas declined 7%, while North America continued to achieve double-digit growth in specialty multi-retail and online.

Third-Party Platform Expansion: Tmall, ASOS and Global Travel Retail

Estée Lauder reported that it is continuing to expand its brand on third-party platforms; it launched its Jo Malone fragrance brand on Tmall in China and launched five more brands on ASOS in the UK. The company highlighted that its Global Travel Retail business is rapidly growing and is experiencing broad-based growth across brands and countries, with eight of the top 10 brands growing in double digits in retail in the channel.

Outlook

For the second quarter, the company provided EPS guidance of $1.47–$1.50, compared to the consensus estimate of $1.63. Net sales are forecast to increase 4%–5%, compared to the consensus estimate of 4.6%.

For the full year, Estée Lauder raised its EPS guidance to $4.73–$4.82, up from $4.62–$4.71, compared to the consensus estimate of $4.77. The company provided revenue guidance of 4.5%, implying $12.75 billion.

Source: Company reports/Coresight Research

2Q19 Results

Alibaba reported 2Q19 revenues of ¥85.1billion ($12.4 billion), up 54% year over year, largely driven by its New Retail initiatives, mainly its Hema fresh food grocery business, Tmall Import business and Intime Department Stores. The company’s operating margin continued to be squeezed, at15.9% in the quarter, due to heavy investments in local services, logistics, entertainment and international expansion. Non-GAAP diluted EPS was ¥9.60 ($1.40), up 12% year over year.

Source: Company reports

Core commerce: Core commerce revenues reached ¥72.5 billion ($10.6 billion), up 56% year over year.

• China retail revenues: Alibaba reported China retail revenues of ¥54.2 billion ($7.9 billion), up 37% year over year. The strong growth was largely driven by its New Retail initiatives, mainly its Hema fresh food grocery business, Tmall Import business and Intime Department Stores.The company’s number of annual active consumersreached601 million, reflecting an increase of25 million over the 12-month period ended June30, 2018.
• China wholesale revenues: Revenues for the China wholesale business were up 46% year over year, to ¥5 billion, primarily driven by an increase in the average revenue from paying members on the 1688.com platform.
• International retail revenues: International retail revenues increased by55% year over year, to ¥4.5 billion ($650 million), primarily driven by growth in revenues on the Lazada and AliExpress marketplaces.

Cloud computing: Revenues from the cloud computing business in 2Q19 were ¥5.7 billion ($825 million), up90% year over year. The strong growth was primarily driven by an increase in the number of paying customers and by a shift toward higher-value-added products and services.

Digital media and entertainment: This segment reported revenues of ¥5.9 billion ($865 million), up24% year over year.The growth was primarily driven by an increase in subscription revenues from Youku and an increase in revenues from mobile value-added services provided by UCWeb, such as game publishing and mobile search.

New Retail Development

Throughout the quarter, Alibaba made good progress on its New Retail initiatives:

• As of September 30, Alibaba operated 77 Hema Supermarket stores, most of them located in tier 1 and tier 2 cities. Hema stores in operation for more than 1.5 years are seeing more than 60% of total sales generated online.
• Alibaba investee and partner Sun Art is now able to fulfill online orders at more than 350 of its approximately 470 stores, after having connected these stores and their warehouse systems to Taobao’s fresh food and general merchandise delivery channel (Taoxianda). Consumers living within a three-kilometer radius of a connected Sun Art store can purchase groceries for on-demand delivery from the Taobao app.

Outlook

Alibaba revised its FY19 revenue guidance downward to ¥375–¥383 billion, reflecting a 4%–6% adjustment.The downward revision is due to the company’s decision, in light of fluid macroeconomic conditions, to delay in the near term the monetization of its incremental inventory generated from growing users and engagement on its China retail marketplaces.