- Kroger taking ‘hard look’ at automated facilities
- Negative development for Ocado
- Biggest FTSE 250 faller
Shares in online grocer-to-technology solutions firm Ocado (OCDO) plunged 10% to 270p early doors on 12 September as investors digested worrying remarks from Kroger (KR:NYSE) on the US retailer’s earnings call.
Ocado’s biggest US partner for its warehouse automation technology, Kroger warned it will take a ‘hard look’ at some of its automated facilities and carry out a ‘full site-by-site analysis’ of its existing network.
These utterances were read as deeply negative for Ocado, since Kroger could move away from the kind of large CFCs (customer fulfilment centres) the UK company provides and lean on local stores to fill orders instead.
In short, these comments imply that Ocado might find it harder to sell more automated solutions to Kroger, and that existing agreements could come under review.
DEMAND DESTRUCTION?
Kroger delivered forecast-beating second-quarter results and raised full-year 2025 guidance, all of which should be positive for Tim Steiner-led Ocado as it piggybacks off the growth of its flagship customer.
However, Ocado’s automated warehouses have been central to its global expansion story, and any shift by the US retailer towards smaller-scale, store-based fulfilment would crimp future demand for Ocado’s technology.
Kroger continues to grow its brick-and-mortar footprint, but on the call the retailer said it accelerating its AI (artificial intelligence) efforts and implied its key focus is on using stores ‘very heavily’ to fulfil e-commerce orders from now on.
Focused on driving down costs and improving profitability, Kroger is now examining ‘all aspects of our business to drive greater efficiency, including a full site-by-site analysis of our Kroger automated fulfilment network.’
Kroger continued: ‘Where we have seen strong demand in high-density areas, these facilities deliver better results than those facilities where density is lower, and customer adoption has been slower. We continue to evaluate all options across all facilities to improve profitability while continuing to provide a great customer experience.’
ANOTHER LEVEL OF RISK
Russ Mould, investment director at AJ Bell, commented: ‘It’s the worst kind of news imaginable for Ocado investors as they’ve bought into a company which has positioned itself as the technology solution to grocery providers’ needs.’
Mould added: ‘While Ocado has continued to win new contracts, the pace has been erratic. The prospect of existing relationships starting to deteriorate adds another level of risk. Then there is the big question of when Ocado will ever make a sustainable profit.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
