SEVEN years ago Jonathan Faiman, Jason Gissing and Tim Steiner quit their highly lucrative jobs at Goldman Sachs to found LM Solutions and build an online grocery retailer. It was an internet start-up with a grand plan but little else.
It seemed a crazy idea. Gissing, the youngest, 29 in those days, said Goldman Sachs told the trio they could plead temporary insanity if they changed their minds and wanted their jobs back.
After all, back in 2000, few people believed that web shopping for groceries would ever take off.
But the online pioneers were convinced that working mums and time-poor executives would welcome the ease and convenience of ordering food from home, and technology could provide the solution.
They renamed the business Ocado, and persuaded former M&S executives Nigel Robert-son and Roger Whiteside to join them. A partnership was forged with Waitrose to sell its products online. They built a high-tech distribution centre in Hatfield to make sure the venture would work efficiently.
And more than £277m was poured into the business by illustrious backers, such as the John Lewis Partnership, Goldman Sachs, UBS and Jorn Rausing, the Tetra Pak billionaire, making this one of the biggest investments in a dotcom start-up in Europe. In addition the company has taken on £77m of debt.
The problem – seven years later – is that, until now, Ocado has failed to make a profit.
But this week the trio, now in their late thirties, believe a turning point has been reached – for the first time in the company’s history it has bounced into the black at an operational level. This means that, before financing costs, the company is now making money.
“It’s an important milestone and one we needed to pass because it proves irrefutably that this business works,” said Steiner.
At the pretax level Ocado is still losing money – losses in the last financial year to December 3, 2006 were £43.1m – and it could take a year or more for that to change. If the company continues to invest to grow, it could take longer.
But on every other level the business exhibits huge promise. From a standing start it now generates annual sales of £325m, equivalent to 13 Waitrose stores, and ships up to 12,000 orders to customers’ homes each day.
And it operates in a fast-grow-ing marketplace. Despite widespread scepticism seven years ago, web sales now account for £2 in every £100 spent on groceries. IGD, the grocery market-research organisation, predicts that one in 10 shoppers will no longer visit a supermarket by 2012 and that sales of groceries online will reach £5 billion in five years.
One day, the Ocado trio believe, the firm could achieve sales of £3 billion if, as predicted, the online grocery market eventually generates sales of between £15 billion and £20 billion. They are nothing if not ambitious.
“It takes a lot of investment and effort to set up a new way of doing grocery shopping. Setting a new standard meant that we had to invest a lot of capital, but nobody looks back at companies once they are successful – like Vodafone or BSkyB – and questions how long it took them to make money,” said Gissing, who once shared a house with Brent Hoberman, the dotcom millionaire who co-founded Lastminute.com.
The Ocado concept is unique. In contrast to sector giants Tesco and J Sainsbury, which deliver groceries ordered online to customers’ homes from local supermarket branches, Ocado delivers direct from its Hatfield distribution centre.
It is an idea that failed in America just a few years before Ocado’s inception, but Gissing and his partners – who still wear dotcom-style open-necked shirts with no ties – are convinced the difference between success and failure lies in the execution.
At the heart of the matter is the efficiency of the distribution centre itself. Steiner, an economics graduate from Manchester, and Faiman, a friend since nursery school who read physics at Imperial College, developed its inner workings themselves.
Spanning the size of 10 football pitches, it rattles and hums like a Meccano set on drugs. A fast-moving 15-kilometre network of interlacing conveyor belts whizzes overhead, transporting 50,000 brightly coloured plastic boxes, which are picked and packed by 700 warehouse staff. It runs from 7.45 at night until 3.30 the following afternoon. The boxes are then shipped to customers’ homes in an area stretching from Bourne-mouth on the south coast to Preston in the north of England.
It is a mind-boggling exercise in logistics.The Amazon warehouse is one of the whizziest, automated distribution facilities in the country, but it looks simple alongside this. Selecting, packing and delivering a mixture of produce like eggs and pizza, which can get squashed or damaged, alongside toothpaste and mineral water, is infinitely more complex than dealing with two or three dry, flat products like CDs or books. Every three days the warehouse has to be refilled.
“You will have heard the saying that ‘retail is detail’,” said Faiman. “We have an intense passion for the detail of making this work.”
Steiner added: “We spent our lives at Goldman Sachs solving complex problems and taking risks, and that is what is required in this business.”
When a customer order comes in, the Ocado computer system splits it up into ambient, chilled and frozen products. Using a giant digital map, the computer then identifies which other orders have been placed in the customer’s local area and what time delivery vans will be available so a one-hour time slot can be selected for delivery. The order is then allocated to a particular delivery van. The computer then ensures that all the orders for that particular van are completed and ready for delivery at roughly the same time.
To enable that to happen, the warehouse staff pick products at an alarmingly quick rate. A cursory scan of the computer that monitors their performance shows the fastest workers are picking products from the automated conveyor belts at between 600 and 800 items an hour. If all the boxes were stacked up at the end of the day the pile would be as tall as Mount Everest.
Faiman insists that it is much faster than the Tesco model, which he estimates could do no more than 100 items an hour using staff hand-picking items from store shelves into a trolley.
Ocado prides itself on making sure orders are delivered accurately – each product is scanned before it goes into a customer’s box and if a mistake is made a red light comes up with a big warning sign.
Meanwhile, by centralising customer orders to one large distribution centre, Gissing insists that it improves product availability and minimises food waste. He claims that Ocado’s waste is only 0.5% of its sales – the lowest of any fresh-food retailer in the world.
The group says that buying online from a dedicated distribution centre is more environmen-tally friendly than even walking from home to a local supermarket. This is because supermarkets consume huge amounts of energy because they need to heat the air to make it pleasant for customers while keeping products chilled or frozen in fridges. A distribution centre can be darker and colder because customers don’t visit. Because Ocado delivers goods direct to customers’ homes it claims it can reduce carrier-bag waste by collecting the old ones and recycling them.
“We want to be the greenest of green, green, green,” said Gissing, whose wife is a green campaigner and granddaughter of Arne Naess, the Norwegian founder of “deep ecology”.
On customer service, too, the group aims to set high standards. Its delivery drivers are forced to polish their shoes on a machine in Hatfield so they don’t get customers’ carpets dirty, and they are trained to go the extra mile to make them happy. One driver waded through 2ft of water during the recent floods to deliver goods to a customer. Another, delivering goods to a woman who had gone into labour, waited until the ambulance arrived. Gissing claims that when Ocado substituted a whole trout for trout fillets, one customer started crying because she didn’t know how to fillet them. But the delivery driver was a former fisherman and he got out his fish knife and did it for her.
Despite its limited financial success so far, the company appears to have rattled Tesco. Gissing claims this is because Ocado is the only retailer in Britain that is taking market share from the sector giant. Even though Waitrose has only 4% of the British grocery market while Tesco has 31.5%, Ocado punches above its weight with an 18% share of the online grocery market.
The two companies have been engaged in an unseemly war of words during the past few months.
Ocado’s Faiman claims “there is absolutely no way” he can believe that Tesco’s dotcom operation can be making a profit, insisting that costs from the web operation must be displaced into other sections of the group’s balance sheet – an accusation Tesco rejects.
Meanwhile, Sir Terry Leahy, the Tesco boss, has declared he does not believe the Ocado model works and is sceptical it will ever make real money.
Ocado’s eclectic roster of backers disagrees. But City sources suggest it has been difficult for the Ocado management to referee their different financial interests. Last year Sir Michael Grade, the ITV boss, was appointed independent chairman and charged with that task – leaving Gissing, Steiner and Faiman to get on with running the company.
At the moment, that involves continually refining the logistics of the delivery process and planning the next phase of growth. The group is currently exploring options for a second distribution centre in Britain and eventually it hopes to expand overseas.
“We get approached all the time by international retailers, but we are not in any hurry,” said Gissing. “We don’t want people to think that we are runaway lunatics.”
Such an accusation would perhaps have made sense seven years ago. But now that the company has turned the corner financially, the dotcom pioneers can finally face off their critics.
"partners ? who still wear dotcom-style open-necked shirts with no ties ? are " Anyone know why the text ? is littered? with ? question? marks?? S. Barraclough
S. Barraclough, Huddersfield, W. Yorkshire