Comment: Kroger to determine future of Ocado
Ocado has been something of a marmite stock for many years, with fans of the automated grocery business continuing to believe its model represents the future of online food, while the naysayers have long questioned its ability to deliver long-term profitability.
The balance of the argument between the two camps is certainly coming to a head with much depending on the forthcoming announcement by US-based grocery chain Kroger – scheduled for early December. It will give details of its future plans with its partner Ocado with whom it has been building CFCs (Customer Fulfilment Centres) across America.
Kroger is Ocado’s most valuable customer, which back in 2018 bought into the automated warehouse model. However, in September this year its chairman and interim CEO Ron Sargent released some chilling words for the UK firm when he stated: “We’re examining all aspects of our business to drive greater efficiency, including a full site-by-site analysis of our Kroger automated fulfilment network. We are taking a hard look at some of our automated facilities.”
The initial deal saw Kroger identify 20 US sites on which it would likely build warehouses, making the group Ocado’s most important partner. However, so far, only eight sites have gone live, with a further two in the cities of Charlotte and Phoenix not due to open until early in Kroger’s 2025-26 financial year. There is an assumption by analysts that Kroger will in fact close two CFCs and that the remaining facilities will have shorter operating lives of around 15 years, down from 30 years previously assumed.
Subscribe to TRBThere is no doubt that Ocado has developed world-leading technology in the field of automated food delivery warehouses and it looked to cash in on this fact when it pivoted to selling its tech solution to major grocery players around the world including Kroger as well as Casino Group, Coles and Aeon. A growing number of such partnerships has underpinned the group’s activities in recent years and the bull case for the business.
But the debate around using automated warehouses versus simply picking online order from stores has continued to rage in the background and the latter has now definitely got the upper hand. Post-Covid-19 the penetration of online grocery orders does not justify investing in automation for most supermarkets. Online sales in the UK account for only 9.5% of total UK groceries, although McKinsey forecasts it will reach 30% by 2030, which sounds rather fanciful to me.
Sargent instead stressed the importance of fulfilling e-commerce delivery from Kroger stores in his statement, which suggests the company is shifting towards the use of food delivery aggregators such as Instacart to service demand in a more asset-light fashion, with a particular focus on sub-one-hour delivery.
This is very much the way it has been playing out in the UK for many years, with in-store fulfilment the preferred route for online grocery retailers with all the major operators in this game. They have also dived into offering quick-commerce services, which are proving increasingly popular – often tapping into the infrastructures of Just Eat, Uber Eats and Deliveroo.
Tesco has a partnership with delivery firm Stuart, called Whoosh, which enables fast order fulfilment from 1,500 stores, while Sainsbury’s has been building out its Chop Chop service, and Morrison’s Now service promises deliveries under its own name but with the deliveries undertaken by the aggregators. Notably Tesco has just announced it is to offer full-basket shops from select stores at certain times of day rather than only fulfilling small orders.
Where all this leaves Ocado is of great concern as the company eagerly awaits the Kroger statement next month. The worst case scenario is that the US group completely curtails its use of CFCs and ends its partnership with Ocado although much more likely is that it decides to scale back its ambitions. While the former would be disastrous, even the latter is far from a ringing endorsement of the automated warehouse model and firmly puts the Ocado naysayers in the driving seat.
