Retailers are facing a complex reality: They must do a balancing act between traditional retail operations, omnichannel goals, and the need to transform their business models. The main challenge is the implementation of omnichannel operating models within the broader digital transformation efforts. The profitability side of the omnichannel equation is the most challenging, as it’s held back by increased supply chain costs, competition and promotional pressure, and legacy structures that were not designed for omnichannel commerce.
So, how can a retailer disrupt its own business model while remaining profitable? Based on IDC’s annual retail innovation survey, retailers are focusing on adopting new technologies, delivering innovation at scale, and accelerating customer growth. But is this feasible or realistic? Yes, and Ocado, the largest pure-play online grocery retailer in the United Kingdom, is a great example.
Ocado delivers food, drink and household goods to 40 per cent of families in the UK, and has over £2 billion in annual revenue, or 7 per cent of market share. More than half of its sales are in the fresh produce category. Since Amazon started AmazonFresh service in the UK in 2016, delivering food within an hour of the order, local last-mile delivery grocers have been under considerable pressure.
In 2016, Ocado had already started its transformation journey as a reaction to new players entering the industry. Ocado invested in robotics, as it had been planning to build an online business since 2000, but soon realized it could increase profits by providing its proprietary platform to competitors. Today the online retailer is selling its technology platform to Morrisons, Auchan and Casino Group. Even if Ocado’s strategy is focused on long-term shareholder value, it has delivered profit in the short term and seen a 250 per cent rise in its share price in the last 2 years.
Read the numbers
The argument could be made that Ocado is a technology company disguised as an online supermarket. With an engineering team of 1,300 people and with 200 patents filed, it is recruiting engineers across numerous disciplines — architecture, infrastructure, software development, data science and user experience. Its ability to drive growth without compromising service quality is impressive, as is its ability to innovate its business model. The company operates from 5:30 a.m. to 11:30 p.m., using 1-hour delivery slots daily, with a product catalogue of more than 50,000 stock-keeping units.
The delivery results are stunning — 95 per cent of its orders are on time, and item accuracy is close to 100 per cent. Ocado’s operations are highly automated: 15 minutes of labour on average per order, almost a fifth the time of store/manual picking. It breaks the conventional trade-offs of online grocery buying. For example, Ocado maintains high item accuracy (99%) while increasing range and labour efficiency over time, all while reducing waste to 0.7 per cent.
Ocado is an example of how new business models will support the future of retail. These new models use interfaces instead of channels, provide proactive customer service and contextual discovery experiences, trace customer moments and time in place of locations, transform passive shoppers into active and engaged customers, and deliver targeted content at each junction of the customer journey. And the customer experience is at the heart of it all.
The customer experience is a key priority, and most retailers globally feel the pressure to adopt experience-based business models, prioritising investments in specific areas such as hyper-personalisation and real-time contextual interactions. Customer experience-focused organisations are reinventing how commerce works, combining commerce with interactive activities to create more meaningful connections with customers and, ultimately, to boost sales.
To achieve this, retailers aim to improve the relationship with customers by building a new layer of trust, based on compliance with rules such as Europe’s General Data Protection Regulation. In fact, as GDPR-type regulations give customers the choice of monetising their data as a value exchange with their suppliers, retailers can integrate progressive consent into the customer journey to provide personalised customer experiences that can become more contextualised, autonomic and measurable.
In the Amazon era, the main challenge for retail organisations is to drive profitable growth without compromising service, and continuously innovate their business models to remain competitive in the “Future of commerce”. Innovation and customer experience will remain at the core of such business models. To succeed, retailers should invest in a retail commerce platform that combines customer journey personalisation, omni-channel commerce, and fulfilment intelligence with current and future consumer interfaces, data services, and enterprise services. All that combined just might make retail companies the digital businesses of today and the future of commerce businesses of tomorrow.