Amazon Vs Ocado : If you can't beat them, then buy them...or should you?

21 June 2013

Barry Moles

Barry Moles

Consultant

Rumours continue to abound that Amazon may buy Ocado for its industry recognised technology. However, this is only half the news.  Amazon, if they decide to move in for Ocado, will take out its primary competitor.  

For Ocado's leadership team, and its shareholders, an acquisition serves up a conundrum: Should they go for a short-term payoff worth a few billion or should it go the big prize which I estimate to be worth  £50 billion by 2025

A view held by some city analysts is that Amazon would benefit greatly from the acquisition of Ocado; and Amazon has the finances to make the acquisition. 

So why does Amazon want Ocado?

Traditional viewpoint

Amazon is currently struggling to make its  fresh groceries operation work in the US.  Therefore, buying Ocado, which has built one of the most advanced technology/logistics platforms for grocery picking-and-packing in the world, makes sense. 

The market opportunity for Amazon is huge.  The grocery business in the United States generated $568 billion in retail sales in 2012, with online accounting for less than 1 percent - and it's among the last major retail sectors that the online giant has yet to tackle.

The obvious benefits to Amazon, according to some experts, include:

  1. Bring much more automation to grocery delivery within Amazon, complementing Kiva Systems and improving margins over time
  2. Accelerate Amazon Fresh's roll-out across the US, realizing material cost improvement
  3. License the platform/technology to third parties 
  4. Hit ROI capital targets faster.

However, the risks are huge as well. Groceries are a notoriously low-margin business, and the competition is massive taking into consideration behemoth Wal-Mart.

My take

Amazon has traditionally taken marketshare by aggressive pricing on many products like the Kindle, which has help build a customer perception of Amazon being the cheapest retailer. 

Iconic retail brands like HMV, Borders, Comet, and Jessops to name a few have all found Amazon impossible to compete with. In fact, Amazon has been very successful so far in achieving its long term strategy of market dominance category by category.

Today, Amazon faces its biggest competition in its drive towards global dominance - and the threat isn't coming from traditional retailers but visionaries that went online years ago. 

Ocado has a strong competitive advantage based around its  technology/logistics platforms supported by its customer offer.  The cost to compete with Ocado in terms of technology is considerable, coupled with a critically long time frame  that would be required to build a comparable technology platform.  This competitive advantage should be leveraged by Ocado..  With the right business strategy, Ocado could very well become  the dominant  global retailer within the next 15 years. 

Summary

Amazon cannot compete today with Ocado's technology/logistics platforms for picking.  The question is therefore, does Ocado take the easy short term option and sell to a competitor and in doing so, deliver marginal short term benefits for shareholders?  Or does it take the  long-term view and deliver massive shareholder benefits by growing a  business  that could net  Ocado £50 billion by 2025? 

Tough choices ahead.

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About the author

Barry Moles

Consultant

I am a retail expert, having spent more than 20 years in numerous managerial and operational roles including merchandise, supply chain, finance and marketing.

I bring a unique hands-on perspective to advising clients having worked in every retail category (food, electrical, clothing, telecoms, pharmacy, charity) across all consumer channels (out of town, online, shopping centres, department stores, concessions and outlet villages) for major retailers in the United Kingdom.

My passion, amongst many hot topics facing retailers, is helping senior executives and their teams plan and run omni-channel retail strategies.

When I am not with a client, I can either be found on the high street or travelling the world with my family.

Bluefin and SAP S/4HANA - welcome to the one horse race

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