- THIS ARTICLE IS FROM THE MT ARCHIVE. IT WAS ORIGINALLY PUBLISHED IN SEPTEMBER 2013
It's been five long years since MT last nipped up the A1 to Hatfield to meet the Ocado boys.
A lot has happened to their company and British retailers since. We're emerging from the worst and longest depression in UK economic history and starting to spend again. Consumers have returned, but are shopping in different ways.
In this country, we are buying more online than any other nation in Europe and old-fashioned bricks-and-mortar retailers are suffering. The ailing UK high street is now undergoing more official reviews than a disputed Ashes wicket.
Not even the all-knowing Mary Portas can save it. One in seven shops is empty - one in four in Blackburn - with the malaise spreading to shopping malls.
Out of town, the massive hangars built by Tesco, Asda and Sainsbury's over the past two decades are starting to resemble costly dinosaurs, unable to pay their way. Tesco wants to increase footfall by getting families back in, enticed by Giraffe cafes. Marks & Spencer makes more than a third less in annual profit than it did 15 years back - its CEO's job dangles on a hanger, dependent on the reception of this autumn's womenswear collection.
Meanwhile, Ocado has been busy growing. It has matured from an attention-seeking toddler that irritated many in the industry and failed to make a profit, to an increasingly self-confident teenager, enjoying being taken more seriously by grown-ups - yet failing to make money.
Making a profit in a cut-throat industry where a 5% margin is the norm and the costs of delivery are high is not easy. After 13 years, Ocado turns over nigh-on £800m annually, has more than 360,000 customers and employs 6,000-plus. Its delivery vans reach about 72% of UK households. A profit, Ocado says, is now in sight.
Rarely has a grocer so polarised opinion. Founded by three slick wise guys from Goldman Sachs with no experience of retail, Ocado floated in 2010 only to be mired in controversy as it became the target of brigand-like bands of share-shorters.
And 2012 was a dark year for the fledgling. But this year it blind-sided the industry by executing a smart co-operation deal with Morrisons, a languishing no-hoper in the home delivery service game. Ocado's erstwhile monogamous partner and principal supplier, Waitrose, was left fuming at this infidelity, although no legal action has so far resulted.
In the six months to June 2013, Ocado was the top-performing share in London, jumping 242% in that first half, and it continues to climb. Yet of the 11 analysts covering the company, only two rated it worth buying, rising to just three by mid-year.
Just the two of us: Tim Steiner and Jason Gissing are the two remaining Ocado founders, after Jonathan Faiman quit. Picture: Harry Borden/MT
Aside from its customers, who love the company with a disciple-like passion, Ocado continues to get right up the noses of some. But it can no longer be dismissed or ignored.
So here they are again - Tim Steiner and Jason Gissing, now 43 and 42, respectively, looking older but still supremely casual in jeans and polo shirts. We talk in the modest meeting room of their unglamorous HQ on the old De Havilland aircraft factory site. Steiner breaks open a bar of posh chocolate to pass around.
But first, where's the missing partner? Back in 2008 there were three founders. Now one, Jonathan Faiman, who we described then as 'the mad professor', has disappeared. A quick Google check reveals that he now owns a bulky superyacht moored in Monaco. What happened there? The vessel looks as big as a ferry.
'It's actually a converted ex-coastguard vehicle,' says Steiner, as Gissing tries to suppress his giggles next to him. 'It used to belong to Bernard Ashley, the husband of Laura. Jonathan, er, uses it. It's a big... toy. Jonathan (whom Steiner has known since north London nursery school) hasn't been involved in the business for over four years. You can't just flit in and flit out, applying the odd bit of brilliance. We're 100% involved every day and it's currently more intense than it's ever been.'
So, how are they feeling? The share price, having started at 180p on debut in 2010, tanked to 56p just a year ago when the wolves were circling but has now rocketed to nearly 400p. Do they feel vindicated? Are they the online messiahs who have at last been listened to?
Steiner takes charge: 'I'm not saying we feel vindicated. Has the perception of us changed? Yes - dramatically. Is online accepted as a major retail channel? Yes. There is no grocery business that doesn't think customers will shop increasingly this way. Our cost structure in online is in a virtuous circle, while bricks and mortar businesses are on a vicious cycle. So I'm a big bear on them and they're having to trim space. There are too many of these shops.'
They get invited to all the big retail do's and win awards, and have finally, after years of sparring via journalists, sat next to Sir Terry Leahy, who used to be very rude about Ocado.
'He was charming,' says Gissing. They are dismissive of those who seek to impose special taxes on online businesses, pointing out that it's the Government that is throttling bricks-and- mortar outfits with sky-high business rates that are sometimes higher than the rent. They pay large amounts of tax, they say, including fuel duty for their vans called Lemon or Cabbage.
At the start, the three did everything themselves but they now have professional managers and a solid board, including the estimable old hand Stuart Rose as their new chairman. Sir Stewie received a golden hello of £400,000 in shares - now worth well over £1m.
So as two of more than 6,000 employees now - there is also a tech office in Krakow - how does the chemistry work between them?
One only asks because, back in 2011, Gissing gave a revealing interview to the FT in which he appeared bizarrely world-weary and on the verge of a premature midlife crisis.
Reminding readers that Gissing had once described Waitrose as 'a pain in the arse to deal with', the article went on to quote him saying that missing forecasts was just 'white noise'.
That wasn't all. He then got started on the self-deprecation. 'I always used to joke to Tim that if we were the Beatles - not that we are - then I'm Ringo Starr. Paul could play the drums better than Ringo, but Paul was busy playing the guitar and singing. But then Ringo married Barbara Bach, who was prettier than all the other women that the boys married - and I've got Katinka... '
This was all most unfortunate, not least because it seemed to suggest that his partner's wife was a dog.
Did Steiner, who is, after all, the CEO and Gissing's boss, give him a bollocking for that interview? It did raise eyebrows and made him look a bit of a flake to the dry-as-dust investment community.
'No, I didn't,' says Steiner. 'We never fight. I got calls about that interview but we just talked about it.'
Gissing has been smiling weakly. 'We're different. I'm more intuitive, he's more analytical. I'm more concerned about the environment and our culture because that stuff comes naturally to me. It all spills into marketing plus branding.' And that Ringo Starr stuff? 'I decided to go to work with two of the smartest people I've ever met. Somebody had to play the drums... Anyway, I was the CFO for 10 years and raised £350m.'
Steiner agrees: 'If an email from an unhappy customer pings into our inboxes, Jason immediately thinks: "How will I communicate with the client to minimise the damage?" But that's only half the problem. What I do is ask: "Is this the result of a software bug that kicks in on the third Thursday of each month at 3.42pm?" But neither of us wishes to be responsible for ruining a children's party.'
They seem genuinely very fond of each other. Steiner gets a bad press for being too clever for his own good, scratchy and difficult. The war of words between him and some members of the commentariat seems never-ending. (You wouldn't want to leave Steiner and the analyst Clive Black of Shore Capital in a room together without putting a warning call out to the paramedics.)
You can see why he does it: not only is Ocado his baby and he defends it to the hilt, but he can't cope with what he sees as poor reasoning when considering his offspring's progress and prospects. That's the Goldman in him. He also comes across a true believer, not yet selling any of his shares but indeed buying a million last year when the price languished at 64p. But he's very bright, quick-witted and, when he relaxes, just as amusing as the more urbane Gissing.
Our interview is interrupted a couple of times by phone calls from family members, including one of his kids ringing to ask if he's allowed to walk home from school. Both men have four young children.
Gissing is far smoother. Tall and exotic looking, he's half-Japanese and his father-in-law was married to Diana Ross for 14 years. He's a well-established member of the Notting Hill set, was at Oxford in the Bullingdon with George Osborne - 'I was the token foreigner serving drinks' - and ensures that David and Samantha Cameron are delivered their Barolo Terre da Vino and 500 grammes of arborio risotto rice on time.
Jibes about the London-focused, middle-class nature of their business are met with the response that 50% of their trade is now outside the M25, that the average income of customers is more reflective of the country as a whole, and that the largest cohort of converts to the Ocado religion comes from Tesco, followed by Sainsbury's.
Steiner and Gissing seem genuinely fond of each other. Picture: Harry Borden/MT
One would guess that while Steiner will still be at Ocado in years to come, as the hard-driving boss of an international business, Gissing will be doing something else. He has expressed interest in the not-for-profit sector.
In the meantime, their goal is to be seen as the British Amazon. But not even this would satisfy them.
'We went over to Seattle to meet Bezos,' notes Gissing. 'He said: "You're tiny compared to me but you can do what I do. I, however, cannot do what you do." We've got that last-mile connection that he lacks. We deliver to our customers ourselves and we've got a 99.9% first-time success rate in making deliveries. Amazon in the early days found 40% of its deliveries were failing at the first attempt. And he's the world's smartest retailer.'
Grocery shopping the traditional way is far from being a pleasure for all and Ocado has strained every sinew to make itself efficient and likeable and a critical part of its customers' lives that would be missed if it disappeared. The staff who carefully pilot its vans - never above 28 mph - are polite and helpful. They are recruited often for the precise reason that they've never worked driving deliveries before.
I wondered if some of the hostility towards Steiner and Gissing is because they are still regarded as Goldman men, spawn of the Vampire Squid. 'I've been doing this for twice as long as I was a banker!' protests Gissing.
But it must have affected their development as business people?
'In terms of having a training,' replies Steiner, 'Goldman was perceived to be the finest managed institution in the field, filled with the brightest people. We weren't rainmakers, dealmakers. We were traders. The discipline this taught us was to re-evaluate every decision constantly, based on every piece of incremental information. A lot of industry is remiss in not doing this. Far too much time in business is spent defending historic decisions. We spend our whole time challenging. We make mistakes and we acknowledge them; we will make more. But there's an old saying in bond-broking that the first cut is the cheapest.' When you make a mistake you get out quick.'
But, quick decisions aside, what of the world of investment banking and its role in the crash of 2007-08? Many seem to have got off scot-free.
'The whole industry got out of hand,' says Steiner. 'And the government was happy to let it get out of hand and take the tax revenue. The government set up the game. However, if you ask me whether bankers should be allowed to short pools of mortgages - which means that if someone fails to pay back you make more - I'm not sure. We've been subject to massive shorting as a business and it's not a zero-sum game.'
'Yes,' chips in Gissing. 'It's like me taking out insurance on your house and then setting it alight.'
Indeed, it must have been unpleasant to know there were people in finance houses, maybe ex-colleagues, who actively wished them ill and helped drive the stock down to 50p, putting the whole future of the business in doubt.
'It was horrible,' admits Gissing. 'And that kind of thing, like a bank run, can become self-fulfilling. I just used to say out loud: "The truth will set you free" and then giggle maniacally.'
But do they think enough punishment has been meted out to the banking industry? Steiner still won't diss his alma mater.
'Too much attention has been paid to those who didn't blow up the system. The government did not have to bail out Goldman Sachs. HBOS and RBS lost far more making ridiculous lending decisions. How many of those people have ended up in jail? Were bribes being given for those loans made against 100% of asset value? If everyone had been run in as disciplined a way as Goldman we would not have had the crisis we've had.'
What of the falling out with Waitrose? The Morrisons deal looks sweet for Ocado from the outside. Ocado signed a £216m licensing contract, including a straight £165m payment from Morrisons, in return for half its new distribution centre in Dordon, Warwickshire.
The rest of the 25-year deal is for access to Ocado's software in return for the promise of fees for IT services, research and management. Ocado will also earn a juicy slice of the earnings from morrisons.com over a certain threshold.
The precious cash was one huge benefit but the changed perception of Ocado was just as valuable. Suddenly, Ocado was a tech logistics company with sexy IP that it could sell to others all over Europe and elsewhere.
When news of the deal broke, Ocado's shares rose 36%, whereas Morrisons' were up a mere 1%. But surely Waitrose boss Mark Price, 'The Chubby Grocer', was justified in feeling aggrieved when he found out that Ocado was on the verge of signing a huge deal with Morrisons?
'It's all over, to be perfectly honest,' says Steiner confidently. 'It was a misunderstanding. I had a chat with Charlie (Mayfield, chairman of the John Lewis partnership and initiator of the Ocado relationship nearly a decade back) and he's fine. QCs and contract breaches were not mentioned. There is no bad will.'
So Price is thrilled and it's back to the love-in? 'Well, Charlie is the boss... Look, Morrison and Waitrose are like Virgin Atlantic and Easyjet. Different businesses. Not everybody is your competition.'
And what happens come 2017, when the supply contract is up for renegotiation? Will it all be over? 'We'll have to see. It takes two to tango. If my largest customer did such a deal I'd know it was to my benefit. And Waitrose will realise it is to its benefit - us being stronger gets its brand out there more.'
Come 2017, Steiner says he has three options - to continue to work with Waitrose (although that may not be his decision to make); to go it alone with Ocado own-label goods; or to get into bed with another grocer.
He protests he cannot go into negotiations with Price without other options because it would be a 'neglect of his fiduciary duty'. The other possibility would be for John Lewis to swallow its pride and allow Ocado to take over waitrose.com. Or let the waitrose.com brand take over ocado.com. Or the pair could sell Ocado to Jeff Bezos. Or they could all go off to Monaco on a coastguard vessel (this won't happen).
There are numerous possibilities in this ongoing game of poker. Steiner loves a hard-negotiated deal and feels he has a stronger hand than he had a year ago.
But there's more. 'I think it's ironic,' says Gissing, 'that at one point John Lewis owned 44% of our business. (This was handed to the pension fund and later sold off.) Now the most vibrant part of their operation is johnlewis.com. They could have gone from 44% to 49 to 51 and eventually owning 100% of us. And it would now own the leading online grocery business, which they could plug jl.com into. Then they'd have what Jeff Bezos dreams of creating in the future.' There's nothing like a bit of stirring...
The pair have certainly never lacked chutzpah. 'What's happening now is the biggest format change in UK grocery since Sainsbury's introduced self-service in 1950,' says Gissing. 'That brought a combination of increased range and lower price, and that's what we're going to be able to do now.
'How much will go online? We think it could go to 50%. Why should I waste my time in a car and traipsing supermarket aisles? We're currently tiny but even with our modest volumes we can soon be profitable. Our margin is slim but the numbers look really good. We can be cheaper than supermarkets, with three or four times the range. Then the tipping point will come. All we have to do is not cock it up.'
With a UK grocery market of £165bn, there is much to compete for. Ocado is tiny and unprofitable but Amazon failed to turn a profit for seven years, and the Ocado boys' hand contains some aces. Customers, staff and shareholders alike will be hoping they play it well.
FOUR CHALLENGES FACING THE OCADO BOYS
STEINER IN A MINUTE
1969: Born 9 December. Educated Haberdashers' Aske's School and Manchester University
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
2010: CEO of Ocado plc as company is floated
GISSING IN A MINUTE
1970: Born 25 October. Educated Oundle and Worcester College, Oxford
1992: Joins Goldman Sachs as trader
2000: Co-founds Ocado, becomes CFO
2010: Director of people, culture and communications
2012: Made commercial director