Podcast June 28, 2024

Sobeys’ E-Commerce Divestment: What Does It Mean for the Future of Online Grocery in Canada?

The Canadian Grocery Landscape Shifts: Sobeys and Ocado Part Ways

In a surprising turn of events, Sobeys, a major player in the Canadian grocery industry, has ended its partnership with UK-based automated grocery fulfillment provider Ocado. This split sends ripples through the grocery sector, raising questions about the future of online grocery shopping and the viability of high-tech, automated fulfillment models.

Sobeys and Ocado: A Partnership Cut Short

In 2017, Sobeys and Ocado joined forces with the ambitious goal of transforming the Canadian grocery landscape. Ocado’s state-of-the-art robotic warehouses and cutting-edge software promised to revolutionize Sobeys’ e-commerce operations. The plan was to construct several automated fulfillment centers across Canada, starting with Toronto in 2020, followed by Montreal, Calgary, and Vancouver. However, the partnership dissolved before the Vancouver facility could be completed.

The High Cost of Grocery Automation

A key factor in the breakup was the hefty price tag attached to Ocado’s technology. The Montreal facility alone is estimated to have cost around $100 million, with the overall investment likely exceeding that amount. While these automated fulfillment centers are marvels of engineering, they require substantial order volumes to justify their expense.

The Pandemic’s Impact on Grocery E-commerce

The Sobeys-Ocado partnership coincided with the COVID-19 pandemic, which fueled an unprecedented surge in demand for online grocery shopping. This initial boom, however, masked the underlying challenges of the model. As the pandemic eased and consumer habits returned to pre-pandemic norms, the growth rate of online grocery slowed considerably. The large fulfillment centers, designed to handle pandemic-level demand, struggled to maintain profitability with fewer orders.

Micro-Fulfillment: A Growing Trend in the Grocery Sector

The Sobeys-Ocado split highlights a growing trend in the grocery industry: the shift towards micro-fulfillment. Unlike Ocado’s massive, centralized warehouses, micro-fulfillment centers (MFCs) are smaller, strategically located closer to customers. This model offers numerous advantages, including faster delivery times, reduced operating costs, and greater flexibility.

The Future of Grocery E-commerce in Canada

The end of the Sobeys-Ocado partnership doesn’t signal the demise of e-commerce grocery in Canada. Instead, it marks a strategic pivot. As the industry matures, we can anticipate a greater emphasis on micro-fulfillment, a laser focus on profitability over growth at any cost, and a more measured approach to automation.

Key Takeaways for the Canadian Grocery Industry

  • Automation isn’t a magic bullet: While automation can enhance efficiency and lower labor costs, it’s not a guaranteed recipe for success in the grocery industry.
  • Micro-fulfillment is gaining momentum: The rise of MFCs offers a more adaptable and cost-effective alternative to large, centralized fulfillment centers.
  • Profitability is paramount: As the e-commerce grocery market matures, the focus is shifting from growth at any cost to sustainable profitability.

The Sobeys-Ocado breakup serves as a stark reminder that the grocery industry is in constant flux. As retailers adapt to evolving consumer behavior and technological advancements, we can anticipate continued innovation and disruption in the years to come.

The Full Episode:

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If you have more questions about the grocery industry and their unique supply chains, reach out to Jennifer & Charles at LIDD.com/contact.

Keywords: Canadian grocery, grocery e-commerce, online grocery shopping, grocery delivery, micro-fulfillment, grocery automation, Sobeys

[00:00:05.160] Hi, Jen.

[00:00:05.850] Hello, Charles.

[00:00:06.710] It is not the end of the week.

[00:00:09.200] Indeed it is not.

[00:00:10.230] This is an emergency special edition last minute podcast behind the headlines special because, well, sort of. We should have done this when the real end of last week when news broke out. But it’s a holiday here, so.

[00:00:28.250] And it would have messed up the recording schedule.

[00:00:31.560] Right. For when these things drop. But news broke that sobeys, Canada’s second largest grocery chain, and Ocado, the. Well, we’ll get into that in a second. But Sobeys and Ocado have divorced.

[00:00:48.420] Yes.

[00:00:50.020] Ocado provides for the listeners. Well, you tell us, what is Ocado?

[00:00:55.170] So Ocado is a. Well, I’ll say two things. In Europe, there are two forms of Ocado. There is the Ocado fulfillment service, where you can actually order your groceries from.

[00:01:07.380] Okada in the United Kingdom.

[00:01:08.550] In the United Kingdom, specifically. Specifically in Canada and the US. Ocado is a material handling equipment like any other. It is a goods to person system that people can purchase in order to do the physical movement of goods within their warehouse.

[00:01:28.810] Right. So if I may, it’s a really interesting storyline. Okay, so we all know about Freshdirect, right? One of the OG pure play online grocery companies. And we, of course, have done work with Freshdirect over the years. We know them and love them, and they always would keep an eye on this ocado company in the United Kingdom, which was the freshdirective of the UK and started by like, investment bankers, which is always a great omen for developing automation solutions. They had decided that they had invented an entirely new way of doing things, which largely, I mean, involves these robots that run horizontally over a massive pit where totes of groceries sit. And they go almost like one of those little games that you play at the amusement park to grab the one of those claws. You drop the claw, hopefully you get a prize. So that was kind of what they were into. And they were claiming this was a revolution in the, at least e commerce distribution. They got into a lawsuit with Autostore, the norwegian company that is on fire across the planet. Autostore, claiming that Okado essentially stole their idea. True or false?

[00:02:55.320] I don’t remember. How do you remember? You’re the expert in this. Do you know how it started?

[00:02:58.590] How it ended out? Yeah, I do not know how it ended. My suspicion is it would have ended out of court.

[00:03:05.750] I think that. No, I don’t know. I think there actually was a real judgment, but I don’t know. We don’t know, look it up yourselves. But I believe someone had to acknowledge not everything was kosher in that deal. So then Ocado, as you rightly said, ah, there’s not really that much money in online groceries. It’s low margin business. You really are not going to become billionaires with that. Why don’t we go out across the planet? You said North America, but really across the planet to sell the Ocado technology and software and go into one major grocery in each country and form a relationship. So in the United States, who did they form that with?

[00:03:50.090] Kroger.

[00:03:50.650] With Kroger. And how did that go?

[00:03:52.580] Well, right now they are also stalling their installs.

[00:03:57.300] Correct. They stopped the installs. Not sure if they broke the agreement up in the way that Sobeys just did this week in Canada, but they definitely stopped and said, we’re just gonna focus on trying to make the ones that we built work. We know in Spain and other countries in Europe, similar deals have been struck. We actually have. I don’t know if you know this.

[00:04:21.530] I don’t know.

[00:04:22.220] Okay. Do you remember Tae Seok in Korea from G’s?

[00:04:25.540] Oh, yeah. That’s throwback. Yeah.

[00:04:27.470] Yeah. From years and years ago. He actually works as a solution engineer at Ocado.

[00:04:32.560] Wow, look at that.

[00:04:33.690] Small world. So big news was Okado’s shares on the news of the breakup between Sobeys and Ocado fell 16%. A lot of loss, a lot of bad news. So let me ask you first off, what was the Ocado footprint with Sobeys in Canada?

[00:04:53.760] Yep. So they have three live sites. They have Toronto, Montreal, Calgary, and Vancouver was the one that was under construction. And so with the end of the partnership, they’ve essentially pulled the plug on the Vancouver site right now. So it was called three would have been four within the next year.

[00:05:17.260] And it’s interesting. Toronto came online 2020. Think about the timeline there comes online 2020. And it’s kind of like, at least in the first giddy months, hard to do wrong. They probably immediately approved construction of Montreal because of the pandemic and what was going on. And then Calgary rolls along and I’m going to guess that’s where it starts to, you know what we’ve. It’s not that the online grocery market has shrunk. It’s that the rate of growth has slowed and returned to normal. Right, right. And so these buildings are struggling to find volumes.

[00:05:55.580] Yeah.

[00:05:57.620] And do you remember? I remember, I think, what the Montreal facility cost. Do you remember?

[00:06:04.900] I don’t want to say my number, because.

[00:06:06.700] Say your number, I will tell you I’m cheating. I don’t remember. I looked it up just before. Yes.

[00:06:12.500] Was it 200 million?

[00:06:13.680] It was a. See, that’s what’s so interesting. The construction was 100 million, I think. Yes, 200. We don’t know. No one ever disclosed. No one sent us the final, you know, budget. Nothing. Not even the budget. So we don’t know. But something kind of mind boggling.

[00:06:32.800] Yeah.

[00:06:33.530] And do you remember in the press release how many employees they said they were going to employ in Montreal at this fully automated facility?

[00:06:41.980] Yeah. That press release at 700.

[00:06:44.820] Yeah. So I just saw one, but I’m using copilot, so you can’t trust it. But it did give me the link. 1515 hundred employees, 1500 employees. So what are we going to draw from this?

[00:06:58.450] Well, I mean, I think there’s some things that we lightly touched on which are very important, specific to kind of the magnitude of getting volume that is required for an ocado solution. So there is only so much demand. There was this massive surge in demand that happened in cities, and as you said, it’s now returned back to normal and it’s just going to go, and it’s three to 5% growth. Slowly but surely. There are other ways for businesses to kind of inject volume. Right. They have perhaps other banners that they can leverage. There’s this whole pickup in store that they can leverage in order to really concentrate as much as possible, volume wise. But one of the deficiencies really, of the Ocado solution is that it has to have a minimum size to it. And one of the interesting things, when we do the comparison, Ocado versus auto store. Auto store can do quite small installations. And so you kind of beg the question, well, why can’t Ocado do smaller installations? Right. We always hear of these since they’re.

[00:08:07.480] Basically call it very, very similar.

[00:08:10.710] Very similar. And so it’s a very interesting comparison that Ocado has gone the larger installation route. I don’t know why they can’t. There is possibly some algorithm element to it that you have to have a certain swarm in order to get the digging.

[00:08:32.030] Swarm, that sounds very technical.

[00:08:33.570] The swarm of the robots that move around on top of the grid in order for them to collaborate together to dig out the tote that you’re using. It is an incredibly sophisticated algorithm that enables the bots to work together.

[00:08:49.820] Right.

[00:08:50.660] And that’s where you kind of go like, okay, well, sounds like there’s something within the software back end of this that has limited Ocado’s ability to scale down their solutions and offer more of a call it micro fulfillment.

[00:09:07.140] That is super interesting. I mean, the use cases where we might see auto store, right, you might have a much longer tail of slow movers than in grocery. Because even if grocery has, that’s one of the things people often don’t understand. Everyone has fast movers and slow movers, right?

[00:09:28.180] Yeah.

[00:09:28.560] The 80 20 rule is true everywhere. I mean, it’s everywhere. There’s human consumption of anything, including entertainment, probably travel options, right? 80% of the people going to Italy are going to Cinque Terre and 20% are going to Puglia. Like that is just the way it works. Human consumption is that way. But so there’s the relative, you know, way of describing a skew population. Then there’s the absolute, right. And in the absolute world, what you call a slow mover in grocery, if I’m in the hardware world, is still a very fast mover in its total volume. So just as you were saying that, you know, why can, why can auto store handle these tiny installs and then why must have these large installs? And you said something visually, now I get it. So the average listener has to picture you have thousands of these totes stacked up on each other. So you’ve got a stack of, let’s say, make it up ten totes just to keep the math easy.

[00:10:40.570] Yeah, 60 for easy bath.

[00:10:42.660] And I need tote number four, right? I’ve got to remove three totes to get to that fourth tote. And I need a swarm of bots because I need three bots to come swooping in and grab three and move them out of the way for the fourth one to come in and grab the fourth one and bring it to a picking station. But for me to do that at the pace required for grocery means I need a mega solution. Whereas if I’m auto store. Yeah, go ahead. I’m just speculating.

[00:11:18.560] Well, so that’s where it is interesting, because there are installations of in a microfilm, the micro fulfillment term being small installs of auto store in grocery, specifically in online grocery, and they are performing well. And so that’s really when it becomes an interesting side by side comparison about, well, how is it that auto store is able to pick at the speed that they’re able to really dig, I think is better than the word to say dig, and that their bots are able to collaborate together versus the Ocado install, are still insisting on these mega.

[00:11:57.280] That’S really mega installs. I could go down roads. I shouldn’t in speculating why that would be, you know, I know why I would tell everyone, oh, no, you gotta buy my giant hammer because it’s better money.

[00:12:11.380] Well, if I could sell you two small ones.

[00:12:13.640] Yeah, I don’t think the OCA, I don’t think they were never thinking like that. I do also, I would disagree slightly with the idea that, oh, I think the autistor works okay, like performs in the micro fulfillment center. But I think the economics of the micro fulfillment center still doesn’t lend itself to this kind of capital expenditure. You know, and I would say that the other difference potentially, which we don’t know, the other difference is that typically the micro fulfillment center is pulling out your hyper fast items and your hyper slow items from the, from the solution. Don’t know if that’s the case, but that’s typically a micro fulfillment strategy does that. So you kind of, you know, the burden, the problem is maybe not as bad, but I make, I’m again, totally, totally speculating.

[00:13:07.440] Right. And there’s, there’s, I mean, there’s a slew of different models of micro fulfillment. And yes, oftentimes they are appended to a store where you can go into.

[00:13:17.900] The absolute slowest place, cream tartar, which is my favorite example.

[00:13:23.820] I mean, you use it very often. So I wonder if this actually is.

[00:13:27.020] A bit of more. It’s my favorite example. Yeah, I know I don’t have any, but if I ever get down to making some marshmallows, I would buy cream of tartar. Another thing that I think I’d like to get your take on. You know, from the frontier edge of e commerce all the way back to the finished end of a manufacturing line and finished goods distribution of a consumer goods company, right? So just to put, you know, end of a Unilever or Nestle factory, finished goods distribution, all the way to that, like each picked last mile world. I think a lot of folks got to realize that if, you know, the first place of the supply chain that will be fully automated is up there at the manufacturing, where there is much less variability and complexity. So, not that their job isn’t hard, but it’s a different thing.

[00:14:33.310] Yeah. When we talk about the, and you’re saying the complexities of automation when it comes to simply storing and moving pallets, these are simple problems that folks have solved for a while. And then as the product that you are handling gets smaller and the volume that you’re touching, you just have greater quantity. That’s where it starts to get harder and harder and harder and harder. And so now we’re getting to a point where an e commerce grocery, where it’s like you’ve broken it down to the smallest thing, and then you layer on that. There’s still the leak concerns, and there’s fragile products that are involved, and there’s. This product can’t go next to this one because of smell. So there’s. Then it’s just the complexity. Just pile and pile and pile on for.

[00:15:25.610] So, I mean, you know, you read this. If you’re one of Sobey’s competitors, you’re probably feeling pretty good.

[00:15:35.370] I would assume so.

[00:15:36.260] You’re probably saying to yourself, all right, I was worried because it’s the fear of missing out.

[00:15:41.410] Of course.

[00:15:42.290] Everyone’s always gonna panic. They’re looking and they’re saying, wow, maybe sobeys.

[00:15:45.950] What’s everybody doing?

[00:15:47.070] Sobee’s has their, you know, has figured something out.

[00:15:49.860] Right.

[00:15:50.380] And this is the kind of news that makes everyone say, oh, yeah, I’m glad I didn’t bite that bullet. It didn’t make full sense to me then, and it certainly doesn’t now.

[00:16:00.990] Well, I would say Sobey’s shareholders do agree with you.

[00:16:04.030] I know, but that’s very. Why did you check Sobi’s?

[00:16:08.090] They went up when Okadas went down.

[00:16:10.730] You’re kidding me. That is so interesting. Like, stop the madness. Yeah. Okay, well, that’s a really interesting thing. I guess that’s enough. I think we just wanted to do an emergency.

[00:16:21.960] Yeah. This rapid fire session.

[00:16:23.490] Yeah. Really appreciate it.

[00:16:25.400] Of course.

[00:16:25.960] I believe, if I’m not mistaken, the next time we meet on this podcast, you will be a married woman.

[00:16:32.480] I will be, yes.

[00:16:33.410] So congratulations.

[00:16:34.290] Thank you very much. It’s very kind.

[00:16:36.030] Yeah. I hope you have a wonderful wedding.

[00:16:37.440] Thank you.

[00:16:37.790] I hope it runs on time.

[00:16:39.110] As do I.

[00:16:40.040] Good. Take care. Bye bye.

[00:16:42.350] All right, bye.

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