Bloomberg News

Ocado Tackles Tesco With 3-D Gaming Technology in Grocer: Retail

May 29, 2012

The visualization can represent all the equipment, 6,000 moving boxes, pick stations and conveyors and can display what’s happening live or replay any part of the production day. Photographer: Jason Alden/Bloomberg

The visualization can represent all the equipment, 6,000 moving boxes, pick stations and conveyors and can display what’s happening live or replay any part of the production day. Photographer: Jason Alden/Bloomberg

Video-game software used to portray three-dimensional warriors, alchemists and dungeons is assisting U.K. online grocer Ocado Group Plc (OCDO) as it expands to take on supermarket giants such as Tesco Plc. (TSCO)

A software package called OGRE helps provide a computer- generated display of the automated processes taking place inside the company’s distribution center in Hatfield, England. Chief Executive Officer Tim Steiner and his management team can monitor the imagery from their iPads to iron out any errors that arise as Ocado increases its distribution capacity to record levels and seeks to become profitable for the first time.

“We used 3-D gaming technology to make the moving images realistic,” Steiner said in an interview. A complex mathematical model enables the software to detect if any part of the 295,000 square-foot (27,406 square-meter) warehouse isn’t working as efficiently as it should.

The gadgetry will become more important over the next 18 months as Ocado seeks to double its product range, adding non- food items such as kitchen utensils that will place the company in the firing line of Tesco and Amazon.com Inc. (AMZN:US) The online grocer is scheduled to open a second distribution center in the first quarter of next year, a key milestone in its efforts to more than triple sales to 2 billion pounds ($3.1 billion).

“We are going to move from being a supermarket today to a hypermarket by the end of this year,” Steiner said. Ocado needs to offer a competitive range to challenge Tesco, the U.K.’s largest grocery chain, and competitor J Sainsbury Plc, (SBRY) though “we’re not going to be Amazon tomorrow,” he said.

Video-Game Hero

The online grocer created its own warehouse-monitoring software in 2008 because there was no product available to cope with the complexity of its distribution center. So programmers opted to employ OGRE, or the object-oriented graphics rendering engine, which is used in games such as the Xbox Live Arcade- based fantasy Torchlight, racing game Proun and animated adventure Okabu.

The technology allows managers to zoom in on any part of the machinery to see an animated rendering of its performance. Like a video-game hero, the user can fly through the warehouse and see what’s happening in bright video-game-like colors.

The visualization can represent all the equipment, 6,000 moving boxes, pick stations and conveyors and can display what’s happening live or replay any part of the production day. And the software allows users to choose what element they want to see from any viewing position, so they can zoom in on problem areas.

No Profit

“IT is a key part of the value in Ocado,” said Andrew Wade, an analyst at Numis Securities with a buy recommendation on the shares. The simulation, allowing users to see lighting, shadows, reflections and textures, is “a useful monitoring and diagnostic tool, and looks really impressive.”

Steiner, one of three former Goldman Sachs Group Inc. bond traders who founded the online grocer 12 years ago, has discovered that growth isn’t easy to manage. Ocado said in December that earnings would miss estimates, hurt by capacity constraints at its distribution center and by the cost of extra staff to ensure orders were fulfilled.

Ocado said last week that revenue growth accelerated in the second quarter as warehouse capacity reached record levels.

The company, which listed on the stock exchange in July 2010 and mostly sells items from upscale grocery chain Waitrose Ltd., has never reported a profit. The shares have fallen 53 percent in the past year and at 105 pence haven’t traded above their 180 pence initial public offer price since last July.

Non-Food Expansion

“Ocado remains a distinctive and interesting business in our view, though it remains a business model distinctly unproven,” Darren Shirley, an analyst at Shore Capital, said by e-mail. He has a sell recommendation on the stock.

Steiner acknowledges that selling Waitrose products alone won’t be enough for Ocado to achieve its financial ambitions. To that end, the online grocer next year plans to start directing its customers to related websites offering products such as pet supplies, kitchen items, baby products and seasonal goods like gardening tools and Halloween outfits.

The concept is similar to Amazon-owned Quidsi Inc., the company behind Soap.com and Diapers.com, which offer a common online shopping cart so consumers can purchase items from any of the sites with just a single checkout.

Creating these so-called destination stores means Ocado will have a broader selection of items, providing customers with a range of products similar to that of a department store, Steiner said. Those goods will be packed separately from groceries, but billed and delivered together.

Online Grocery Growth

“They already have a core customer base so broadening their product range into non-food makes sense,” said David Gray, an analyst at research company Planet Retail in London. “They are being quite forward looking putting in place capacity for non-food.”

Steiner estimates that Ocado will offer about 10,000 non- food products by the end of this year, up from about 4,500 now. The total range may increase to as many as 40,000 items by the end of 2013 from about 21,000 today, he said. That would make Ocado’s selection wider than a Tesco Extra store, the retailer’s largest format. Tesco would still outrank Ocado online, though, with about 75,000 items today.

Ocado is the U.K.’s eighth-largest online retailer behind Amazon, Tesco, Sainsbury, Apple Inc. (AAPL:US), Dixons Retail Plc (DXNS), Next Plc (NXT) and Wal-Mart Stores Inc. (WMT:US)’s Asda. It held a 2 percent share of the 27.8 billion-pound U.K. online market last year, according to Euromonitor International.

Steiner wants to grab a larger slice of that business, and by using innovative technology to get there he may have an edge.

“Ocado’s efficiencies and technological excellence may put them at an advantage” to larger competitors, said Jon Copestake, a retail analyst at the Economist Intelligence Unit.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net


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