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Panic buying highlights the strengths and weaknesses of Ocado’s model

Let’s be honest, all supermarkets have struggled this past month to meet the demands of their customers. This is natural, of course, given the surge of panic buying that goes far beyond normal demand (not to mention good sense).

While high street stores simply offered empty shelves to unhappy customers, online retailer Ocado (LSE: OCDO) has been forced to place people in long virtual queues. It even shut down for a few days this month in order to implement a number of new systems to deal with panic buying.

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Some people highlight these problems as showing the weakness of Ocado’s picking, packing, and delivery systems. There is some truth to the criticism. But in many respects, Ocado is better placed than its competitors to take advantage of the surge in demand for online grocery shopping.

Robotic warehouses

One of Ocado’s best advantages is that its warehouses are automated. Robots do almost all the work – from picking the food off the shelves to packing it. Even the delivery routes are automated.

For the majority of high street stores, this same process relies almost entirely on people. Online orders involve a human either picking the products in a warehouse or from the shelves in a traditional store.

Bricks and mortar grocery stores were never designed for online shopping, of course, whereas Ocado was. This isn’t to say Ocado is without issues. Indeed there have been a number of reports from company insiders suggesting this latest surge in demand has highlighted the age of its computer systems – that while they are very good, they are also very slow.

This has led, of course, to the company implementing a number of new systems to help face the surge in capacity. This appears to involve queuing systems and slot allocation rather than increased capacity itself.

Overcapacity or inefficiency?

It may be natural for people to think a company like Ocado should always be able to meet the massive demand we have seen in recent days. But the recent surge in demand brought about by panic buying is an exception rather than business as usual. It may even be a once-in-a-generation occurrence.

A company should not be expected to stand ready to meet such crazy demand at all times. It would be inefficient, a waste of money, and probably lead to the company’s downfall.

I suspect Ocado is actually well placed to take advantage of the coronavirus physical distancing measurers put in place. It will be natural for more people to shop online rather than go to their local stores. In the online retail market, Ocado has, for the most part, the best advantages.

Its robot warehouses are cheaper and more efficient that human picking and packing. Admittedly it has seen some teething problems, but so have other grocery stores. I think the next few months could really help bolster Ocado’s bottom line this year.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.