The MT Interview: The Ocado Boys

Let's discuss obsession, in its many forms. 'Here it is,' says Tim Steiner, handing me his BlackBerry.

Steiner, co-founder of Ocado, the online grocery business, wants to show me an e-mail from a journalist recounting a recent meeting with Sir Terry Leahy, boss of Tesco. The e-mail tells how Leahy ended the session by cracking a joke - he'd managed not to mention Ocado all lunch.

'And then, of course, he had,' says Steiner.

'He's obsessed,' says Jason Gissing, the second of Ocado's co-founders.

'He is very, very pre-occupied with us,' agrees Jon Faiman, the last of the trio.

Likewise the Ocado team with Leahy, perhaps. Spend a couple of hours with them and it all keeps coming back to Sir Terry: the barbed remarks he has made about their progress, the knocking ads Tesco has run, and the needle of competition that Tesco has jabbed them with as it has ramped up its service against theirs.

The week we meet, Ocado's founders had fought back, with a mailing to customers promising to match Tesco's online prices on branded items. Tesco dismissed it as a marketing gimmick, but Ocado's sales have surged. 'We are 20% up on last week, and that was a record week,' grins Gissing.

But behind the excitement, you can sense the anxiety. Some think it is suicidal for Ocado to launch a price war against the UK's number one supermarket chain. After a long period of difficult relations, Tesco now looms over Ocado like an elephant over an ant, ever threatening to come down on it with a massive thump. But that, explain Ocado's founders, is a good thing. They must be doing something right.

So why would Ocado's founders get under Sir Terry Leahy's skin? Here's a stab at it. First, they set up an online grocery business when they didn't even have a supermarket chain to found it on - a model that has foundered everywhere else. Second, they have run it for eight years at a loss just to get it established. Third, despite those losses of nearly £300m, they get lots of positive publicity because they are an underdog that journalists like. And fourth - and I bet this is the kicker - they had zero supermarket experience. Worse than that, they are three former brokers from Goldman Sachs who had an idea and the chutzpah to strike an opportunistic deal with Waitrose. From privileged backgrounds, unlike Leahy, they obviously thought the grocery business was easy-peasy. Not any more.

'We were arrogant and naive,' concedes Faiman. 'If you'd asked us if we were afraid of anyone in the supermarket business, we wouldn't have understood.'

Steiner runs a hand through his thinning hair. 'I think we probably didn't realise just how complicated it would be.' He describes Ocado's start thus: 'At Goldmans, you never promised a client anything unless you could deliver. We just thought if we hired the best IT, integration and logistics firms, we could quickly put this together. What we learnt was it didn't work like that.'

He sighs. And so the story begins - there is not much like it anywhere else in British business. Three super-bright young blokes earning large amounts in high finance deciding to chuck it all in and start a real business - almost an old-fashioned business with a dot.com twist.

'It's like how shopping used to be done,' says Steiner. 'Historically, the grocer would know what you wanted and then deliver it. Now we can use the processing power on your desktop to let you choose items for the same price as going to the supermarkets - and get them delivered.'

Simple, apart from the fact you have to organise it all, and then deal with the competition. Steiner nods. He is sitting in a ground-floor meeting room in Hatfield, Hertfordshire, off the cramped, unglamorous office he shares with his co-founders. Short, shy and sharp-tongued, with hamster cheeks and darting eyes, Steiner, 38, operates as Ocado's chief executive.

Gissing, 37, Ocado's marketing director, is tall, volatile and charismatic. He is also exotically good-looking, by virtue of a Japanese mother and British father. He fronts a lot of the firm's key relationships, and runs numbers day-to-day.

Faiman, 38, an old nursery-school chum of Steiner from north London and now Ocado's chief operating officer, is the 'mad professor' of the three, more thoughtful, more earnest, preoccupied with unpicking their endless logistical, operational and hi-tech problems. He could look like anything at all - he doesn't turn up to our meeting.

Steiner: 'He's in New York'

Gissing: 'He's in Iceland.'

Later, Faiman rings to say he is flying a plane back across the Atlantic. Perhaps he was flying it himself - you could believe it with these guys. Despite their bruising introduction to the grocery market, they still have the confidence of former Masters of the Universe. Dressed like Sunday bankers in jeans, jumpers, and chunky big-brand watches, they are unlike any other grocery bosses you'll meet: loquacious, mostly incautious, and genuinely determined to make you love their baby as much as they do. It doesn't mean that everyone likes them - some in the grocery business still find their brainy arrogance tough to take, and hope they fall flat on their faces. But they are good company.

Your next thought? They must be mad. Tesco has global sales of £47bn, Ocado has sales of £350m - growing but still tiny by comparison. Then there is Sainsbury, Asda, Morrisons and more. Who would want to take on all those? Let alone lose the six- or seven-figure pay packages at Goldmans to do so.

Steiner frowns. 'I think we just wanted a proper business and some control.'

Faiman says it was simple. 'We were turning 30 and we didn't want to work for someone else for the rest of our lives.'

Gissing pulls out another long smile. 'We just thought: let's go for it. Anyway, they asked me to join them - you'll have to ask them why.'

Talk to them individually and you soon find out why: all three came from well-off backgrounds where their families ran their own businesses. Steiner's dad worked for Steiner Leisure, set up by his great-grandfather - once a hairdressers chain, it is now the biggest operator of cruiseship spas in the world and listed on Nasdaq. Faiman's father ran Faiman's dress shops in north London. His mother had furniture shops. Gissing's parents ran import/export both ways between Britain and the Far East.

Ergo, it's in their blood. And what strikes you is that they run a thought-out, people-centric business, right from their own committed enthusiasm down to the terribly nice drivers who help you unpack your boxes. Faiman says he simply loves his business and his people, and it shows. The top-notch service and quality food have already won them about 50% of the home-delivery market inside the M25. When I get home and place an order with Ocado to try them out, I receive a folksy text back the next day: 'Here's a little reminder of your 12pm-1pm order. It will be delivered by David in Cabbage Van KGO5 ZTT ...'

In fact, Ocado, starting from scratch, does it all in a different way from any of the supermarket majors, who set up their online operations with an eye to using their local branches, hand-picking orders off the shelves. But Ocado delivers everything from one huge computerised warehouse - next to its Hatfield industrial estate office - where order boxes are 'picked and packed' with Waitrose items by machine before being lorried to five regional hubs. Smaller vans take the boxes to your door. That way, it covers 14 million of the UK's 24 million households.

The Hatfield warehouse, designed virtually from scratch by the trio, is extraordinary: the size of eight football pitches and packed with whirring belts, ramps and shelves, half-factory, half-Heath Robinson contraption. Just sorting out the computer code to operate its systems puts Ocado years ahead of its rivals, says Steiner.

Is he worried about Marks & Spencer's imminent entry into online food? He shrugs. 'As far as I am aware, M&S doesn't even run distribution of foods to its own stores; it has no breadth of knowledge in this field. It would take it three to four years to set up something similar.'

So why has it taken Ocado so long to make the operation profitable? The firm made a loss of around £33m in 2007, making it 'Ebitda-positive' - generating cash on top of its £35m fixed costs - but still a way from being in the black. That's why old hands like Leahy say they just don't think the business is sustainable, as food retailing has such low margins.

But the Ocado team have made a choice: to drive the service nationally, while making a loss, rather than staying small. 'No-one has ever done this kind of business before,' says Steiner, 'and we are doing it in a different way to rivals - though Tesco is moving its operation into a dot.com store, it doesn't have the systems and processors we run it with, and it has to offer an inferior customer proposition ...'

He stops and grins at my tape recorder. 'Come on, Terry, get your lawyers out.'

Now, with some stability attained, he continues, they can really start planning the future. They appointed Goldman Sachs as financial adviser two years ago. Do they still want to float the business? Are they after more money for another big warehouse up north?

Gissing and Steiner look cagey. Then Gissing starts: 'Actually, the reason we appointed Goldmans was I got fed up with individuals and institutions phoning up and telling us what we should be doing ...' Steiner cuts in: 'Can we rephrase that? We found it difficult to manage the expectations of some very major supporters, because we wanted to please them all ...

Gissing continues: '... so we hired the advisory bank to help us negotiate with the various stakeholders, and we appointed Michael Grade as independent chairman, and people put two and two together and made five.'

Are they under pressure from their investors? John Lewis, owner of Waitrose, has a 24.1% stake, the bank UBS has 11%, other cuts include those held by Goldmans and a slew of wealthy investors, such as Tetra Pak billionaire Jorn Rausing, who is reported to have 7%. Steiner, Faiman and Gissing retain about 22% (split 8-8-6, as Gissing came in later).

Leahy's comments about sustainability made everyone antsy. 'I was told only this week that we were going out of business,' says Gissing, shaking his head.

Steiner brings it back to the question. 'OK, at some time in the future we will have some kind of liquidity event. It could be a listing, a trade sale or something else, some kind of buyout. But the majority of those investors didn't go into it as a bit of fun; they invested in a real business, now with over £7m sales a week, and 3,000 people employed' - and with 150,000 active customers who spend an average of £110 every time they log on. 'Investors are in it for the long term.' Steiner simmers and shakes his head. 'I think Tesco is just hostile, because every time they rubbish us, opinion-formers and journalists say: 'You can't do that because, actually, we use it.'

But wouldn't Tesco's size enable it to win any price war with Ocado?

No, says Steiner, bluntly. 'If Leahy launches a bloodbath, there are only two ways he can do it. At the moment, he prices the internet alongside his stores. If he cuts prices in his stores, we are just going to follow him. For every million pounds it costs us, it will cost him £100m. His other option is to undercut his own stores and do different internet pricing, but who's he competing with then: our £350m or his £33bn UK sales?

'And if he tries to take £10 off every internet order, two things will happen. His business will migrate online and hurt his profitability. And I think the Competition Commission would be interested as well. Why is he using a store business to subsidise his online business, using his large scale to try and influence another market? I'm not a competition expert, but isn't that what the authorities are looking for?'

John Lewis, which owns Waitrose, must be bemused at the level of hostility now engulfing Ocado and Tesco. It is also a possible buyer for Ocado, should its founders ever cash out.

But would Waitrose want it? On one level, the service is a great add-on to the chain, which takes less than 5% of the British grocery market (to Tesco's 35%). Ocado, by contrast, has close to 20% of the online equivalent.

But some inside John Lewis think Waitrose should never have done a deal with Ocado in the first place, and would do better to build its own service. Confusingly, it operates local deliveries in its own Waitrose vans outside the Ocado system. Just how tight that Waitrose/Ocado contract is remains the subject of speculation.

'I can't comment on what goes on in Waitrose,' responds Steiner. 'It is unusual, as it's part of a partnership, so employees are likely to be more outspoken than, say, at Tesco. We have a contract, it rolls, and from to time we renegotiate that contract.'

It's worth remembering who courted who for the deal - the Ocado founders were going it alone till they were rung up eight years ago by the new development director at John Lewis, begging them to come in and talk about their plans. 'We had a conversation and just went for it,' nods Steiner. The name of that director was Charlie Mayfield, now John Lewis's chairman.

Others close to the Ocado team suggest, however, that rival supermarket chains would be more logical trade buyers - even Tesco itself. Could Ocado switch suppliers? Yes, apparently, but the clever money is still on a float in 2009.

But don't they now regret leaving the City's big-bonus culture for eight years of this graft and grief?

Gissing, who'd toyed with leaving Goldmans to become a film producer before setting up Ocado, pulls a face. 'The strongest influence on me was my late father-in-law. He was an entrepreneur and a mountaineer, and he taught me that you only get one shot at this life, and if you have passions you should pursue them.' (Father-in-law Arne Naess's passions included Diana Ross - he was married to the singer for 14 years.)

Faiman backs that up: 'It's not about money, it's about success after taking a risk. I have lots of nice things, I know unbelievably wealthy people, I can see how a sense of happiness arrives - it's through a sense of achievement.'

The truth is that none of the three was that happy at Goldmans anyway, though they are careful not to spell that out - they still need those City connections. But by 1999 Steiner was looking around for a project to take advantage of the dot.com boom. Other colleagues were peeling off into hedge funds and private equity. Faiman was an old mate. 'We understood something fundamental had changed,' says Faiman, 'and we wanted to take advantage of it.'

And they brought Gissing in because they needed his charm. 'Tim and I were conscious we were not outward-facing,' continues Faiman. 'We were risk-takers, but Jason was good at forming relationships. We knew most of the first year would be spent trying to get people to join us. But beyond that, we all basically have the same skills, which is useful. Being three people who can think in the same way, you can spread yourself around.'

They took traditional job titles because employees and suppliers needed to know who did what. But each is paid the same and all three are joined in one thing: they are determined to prove to everyone - old Goldman colleagues, competitors like Tesco - that they can make their business a runaway success.

But will they? The Ocado trio say trends are moving their way. They claim their central warehouse delivery system makes them a greener alternative even to walking to your local supermarket, if you take into account the energy consumed refrigerating and operating the average store. And in an economic downturn they may even prosper, as people eat out less and order in better food.

In truth, no-one really knows. But they do envisage being more than just retailers, developing relationships with consumers where they can plan weeks of meals for you, deliver ingredients for recipes, offer online help in cooking them, predict other purchases, and become much more part of your everyday life.

And sell more than just Waitrose items? One way to get round low margins might be to broaden into own-brands and non-food items. They already sell Ocado-branded vegetable boxes.

Says Gissing: 'We listen to what customers want, and if they want specific things then we'll try and arrange it ...'

Adds Steiner: 'But at the moment, it's more like particular brands of tea. We do sell some products that Waitrose doesn't sell, but our relationship precludes us selling items from others. We could, however, introduce more Ocado-branded items over time.'

Instead, they will concentrate on expanding their footprint to reach 18 million households. And in 10 years' time - if investors' confidence hasn't run out and if Tesco and others haven't stomped them out of existence - will they still be sitting here, grinding it out?

'I'll answer that,' cuts in Gissing. 'I think Tim will be running a global Ocado, but I'll be doing something else. I've been offered a couple of jobs in the not-for-profit sector, and if I did anything other than this, it would be that ...

Steiner has his head in his hands. 'Don't say that! Terry is going to have a field day if you say you want to work for the not-for-profit sector. You already work in the not-for-profit sector!'

Gissing rolls his eyes. Steiner laughs. So no chance of them risking their arm as serial entrepreneurs, launching other projects?

They look at me like I'm bonkers. A close adviser to Ocado puts it thus: 'They've reached a stability in the last six months, they are cashflow positive, now they know they will survive.' They have just got to convince everyone else.

FOUR CHALLENGES FACING THE OCADO BOYS

1 Broadening the coverage to include the whole of Britain

2 Persuading anyone below the upper middle classes that Ocado is for them

3 Sorting out their ownership structure

4 Deciding when to cash in

STEINER IN A MINUTE

1969: Born 9 December. Educated Haberdashers' Aske's School, Elstree, and University of Manchester

1992: Joins Goldman Sachs. Roles include head of non-US dollar Eurobond trading, head of Asian credit trading, high-yield trading

2000: Co-founds Ocado

GISSING IN A MINUTE

1970: Born 25 October. Educated Oundle, Northants and Worcester College, Oxford

1992: Joins Goldman Sachs as trader

2000: Co-founds Ocado

FAIMAN IN A MINUTE

1969: Born 9 February. Educated at St Paul's School, London and Imperial College, London

1991: Joins Bankers Trust as a trader

1995: Moves to Goldman Sachs, later becoming head of emerging-market trading

2000: Co-founds Ocado.