Ocado shares sink after key customer Kroger scales back partnership

Ocado Group’s shares fell more than 17 per cent on Tuesday after US grocer Kroger announced it would close three underperforming warehouses developed using the UK company’s technology, dealing a major blow to its licensing business.

The London-listed group, which provides automated technology for distribution centres as well as running its own grocery business, said it would miss out on $50mn of revenue in its current financial year as a result of the closures.

Ocado added it would receive $250mn in compensation, while Kroger said it expected to incur about $2.6bn in impairments because of the closures and its automated warehouses not meeting financial expectations.

The agreement with Kroger in 2018 was hailed as a breakthrough moment for Ocado in its ambitions to transition from a barely profitable online grocery retailer into a fully fledged technology licensing business.

By landing the US’s biggest supermarket chain as a client, Ocado appeared to have secured a landmark endorsement of its automated distribution centres.

Shore Capital analyst Clive Black, a long-term Ocado sceptic, said he had not expected Kroger to shut more facilities after it announced the closure last year of three centres developed with Ocado.

“[It] is a ‘wow moment’, given the expense and youthfulness of these centres,” he noted, adding that Kroger’s statement was “a devastating blow” to the credibility of Ocado’s proposition.

The deal with Kroger opened the door for Ocado to sign more agreements with international grocers, which helped to propel its stock market valuation to more than £20bn in 2020. Ocado’s shares closed down 17.4 per cent on Tuesday at 179.9p, leaving it with a market capitalisation of £1.5bn.

Ocado and Kroger’s original plans were to develop 20 automated distribution centres — in which robots pick, transport and pack groceries — over the course of three years.

But Ocado’s facilities, which require vast amounts of upfront investment, need to be operating at close to capacity to deliver a return on that outlay.

Brittain Ladd, a US-based logistics consultant, said Ocado’s technology was “excellent” but that the UK company and Kroger’s strategy of focusing on vast, capital-intensive distribution centres, when the US grocer had only minimal online sales, was a mistake.

“The strategy was ‘Build it and they’ll come’. That was never going to happen,” he added. “For Ocado this is a massive black eye. It failed, there’s no other way to spin it.”

While scaling back its use of Ocado’s automated warehouses, Kroger has expanded its relationship with grocery delivery company Instacart, which employs “personal shoppers” to pick and deliver groceries from stores, and Uber Eats.

The US grocer said it would also begin a “capital light” pilot in which it fulfils online orders from its own stores in highly populated areas.

A growing number of retailers — including Tesco in the UK and Walmart in the US — have chosen to fulfil a greater proportion of online orders from their stores, which are located closer to customers’ homes.

The Ocado deal was signed off in 2018 by Kroger’s then chief executive Rodney McMullen, who was replaced this year on an interim basis by Ronald Sargent, after a board investigation into McMullen’s personal conduct.

After conducting a four-month review into its ecommerce operations, Kroger said on Tuesday that it would close warehouses in Wisconsin, Maryland and Florida.

The grocer added it had identified “opportunities to optimise” its network and that it was “monitoring” the performance of its five remaining automated warehouses.

Ocado said it was continuing to engage with Kroger on its partnership, adding it expected “significant growth in the US market” for its technology.

The company also has partnerships with retailers including Coles in Australia, Wm Morrison in the UK and Sobeys in Canada.