The value of online grocer Ocado has fallen sharply after Kroger, its major partner in the US, announced the closure of three warehouses using the UK company’s high-tech equipment.
Ocado signed a deal to build 20 automated warehouses – known as customer fulfilment centres – for Kroger, the US’s fourth largest retailer, in 2018. Eight of those facilities are currently operating with two more planned for next year. The deal was seen as a major part of Ocado’s plan to sell its online grocery delivery technology internationally.
However, on Tuesday, Kroger said sites in Frederick in Maryland, Pleasant Prairie in Wisconsin, and Groveland in Florida would close in January. Shares in Ocado were down more than 17% on Tuesday after the announcement, wiping about £350m off the value of the company.
Kroger said that after reviewing its set-up it had “identified opportunities to optimise its fulfilment network”.
It added that it would now move towards a “hybrid fulfilment network” testing out “capital-light, store-based automation in high-volume geographies” while continuing to use automated warehouse processing of online orders where it sees “higher density of demand”. It noted that it had recently expanded its relationship with quick delivery service providers DoorDash, Instacart and Uber Eats, which take goods directly from stores on bikes, mopeds and other small vehicles.
Clive Black, a retail analyst at Shore Capital, described Kroger’s announcement as a “near knockout punch” for Ocado, prompting the share price to fall below the 180p price at which it debuted on the London stock market in 2018.
He said the online grocery technology supplier “is being marginalised as most of its customer fulfilment centres do not work economically in the USA or the mass-market first world in truth.”.
While centralised, automated warehouses may work effectively to manage home deliveries of groceries in densely populated and affluent urban locations, according to Black, he said Kroger’s actions suggested that the size of Ocado’s total potential market “has been blitzed”.
“We had expected Kroger to trundle on, not close [warehouses], as part of its ongoing review, a dreadful acclamation of what Morrison, Waitrose and others already knew: capital intensive, centralised fulfilment of food to a dispersed mass-market customer does not financially work.”
Ocado said it expected to receive more than $250m (£190m) in compensation for fees related to the early closure of the sites but its fee revenue would take a $50m hit in the financial year to December 2026.
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“Ocado continues to support Kroger to optimise logistics operations and drive profitable volume growth in these remaining sites, with constructive ongoing discussions around further use of Ocado’s technology to support Kroger,” the British company said in a statement.
It added that it “expects significant growth in the US market, both with [warehousing] and store based automation.”
