Ocado automated warehouse fire cause identified

The cause of Ocado's disastrous automated warehouse fire at Andover, England, earlier this year has been identified as an "electrical fault at one of the first-generation battery charging units at the edge of the ambient storage grid....caused the plastic lid on top of a grocery-carrying robot to catch alight." This was revealed in a document issued to shareholders as part of its planned tie-up with Marks & Spencer (M&S) retail group. Steps to prevent further crippling fires involve introduction of extra "localised" smoke detectors and removing the plastic lids on its robots, which serve no practical purpose and will not impact the robots' efficiency. It also plans to add heat sensors in the ambient product storage grid, in addition to the those existing sensors in the chilled storage grid. Curiously, however, one is left asking why an 'award-winning' fire suppression system was so quickly overwhelmed. Fire fighters at the scene also remarked on the highly compact nature of the grid storage locations over the top of which hundreds of robots swarmed, which made it difficult for firefighters to get around easily.

Automated warehouses have been around in Britain since the 1980s and while their level of applied 'intelligence' has grown remarkably there are certain aspects that have not changed. Their costs and risks remain as high as ever, and while some improvements have been made regarding their flexibility, if business circumstances change so much as to make them redundant then their resale value would be near zero. Their payback periods will, of course, vary according to how hard they are worked and that, of course, is a function of customer demand, but anything less than five years would be unlikely. All this shows the critical necessity of conducting a sound payback exercise. But is there something else that may be overlooked and yet is critical to any successful, automated warehouse? Yes, there is, and big automation investors ignore it at their peril.

                 Price governs automation viability

The overall business model must be closely examined in relation to where a company stands with its competitors. If the revolution in British food retailing over recent years proves anything it is that price is king, but the dominant  retailers have still not taken that fully on board, which partly explains the meteoric rise of the food discounters like Lidl and Aldi, who between them now account for nearly 15% of the total UK grocery market. Their secret of success was two-fold. They spent far less on outfitting new shops and brought them to readiness much quicker. Secondly, they treated inventory-holding costs with respect, because such costs can dwarf all other warehousing costs combined. This meant sticking with far fewer product lines, typically 1,600, compared with 40,000 for their big competitors, all of which were chosen for their fast turnover rates, and if they began to slow they were quickly replaced by anticipated fast movers. Translated at the shopping level, it meant buyers, comparing like-for-like shopping baskets, could expect to spend 30% less than with the big four retailers. 

This brings us back to the payback scenario that will emerge next year once Ocado has dropped food retailer Waitrose in favour of M&S. Next year M&S will pay £750 million to form the 50-50 joint venture with Ocado to allow it to offer its customers an online service, currently lacking. In the Ocado shareholders' circular about the fire, however, it warns of several risks relating to the deal, one of which is that Ocado's retail customers may stop shopping with the company and instead buy products from Waitrose online or other competitors because they view M&S to be more expensive. In one survey of 250 Ocado customers a disturbing 22% said they would no longer remain with the company if it did not sell Waitrose products. M&S's notoriously high food prices  may yet prove its undoing now that it has embarked on a costly automation route. Before its proposed tie-up with Ocado was announced, M&S's food side was already struggling against cheaper competition, warning enough, one would think, in a world where price is king.

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