How Ocado ups the stakes in the online grocery prisoner's dilemma

For the last year or so Ocado has been marketing its "Smart Platform” as a turnkey solution for food retailers outside the UK looking to jump-start their e-commerce activities. CEO Tim Steiner has told investors they expect to be able to announce a couple of deals with international grocers by the end of 2015.

On the plus side, Ocado's proprietary web interface and order fulfillment technology delivers an excellent end-to-end service; Ocado and Morrison (their only client so far) are both top-rated for customer satisfaction, comfortably ahead of multi-channel competitors such as Tesco. On the other hand, Ocado's solution is expensive – they need other retailers to help finance their heavy R&D budget. Furthermore, one has to consider the strategic risk of outsourcing what is rapidly becoming a key capability (serving customers online) to a company whose CEO preaches the terminal decline of brick and mortar retailers as a result of online cannibalisation, and which could eventually be acquired by the likes of Amazon.

What is certain is that the option to go with Ocado makes the game of prisoner’s dilemma for brick and mortar grocers in Europe and the US that much more risky. Say no to Ocado, and you risk letting a competitor leapfrog ahead of you and steal your high spending customers. Say yes, then you trigger an online space race where first mover advantage is likely to prove temporary and which for the market overall adds only cost not sales. To extricate themselves from this dilemma, the players will need to look for new solutions outside the prison that is rising around them.