BREAKINGVIEWS-Ocado's bright robotic future suffers a glitch

By Jennifer Johnson

LONDON, Nov 19 (Reuters Breakingviews) - Ocado OCDO.L has long talked about its vision for automated grocery warehouses, where an army of robots pick customer orders in minutes. That aspiration took a major knock on Tuesday when U.S. retailer Kroger KR.N, the UK company's most important partner, said it would close three of eight customer fulfilment centres (CFCs). The move suggests demand for hyper-efficient supermarket deliveries is confined to densely populated areas – and that Ocado’s potential market is not as big as it once appeared.

Kroger initially joined forces with the London-listed company in 2018 and committed to building 20 CFCs across the United States. That plan is seemingly off the cards, with Kroger taking an impairment charge of $2.6 billion in the third quarter because of the warehouse shutdowns. The implication is that the three sites – in Florida, Wisconsin and Maryland – underperformed because of their more remote locations.

The immediate financial hit to Ocado is manageable. Analysts at Bank of America reckon that lost revenue of $50 million next year equates to a 7% reduction in the company's recurring technology sales. A $250 million compensation payment also softens the blow. But Kroger's retreat may give other supermarket groups pause before installing Ocado's technology in their own CFCs.

Prior to Kroger's announcement, analysts polled by Visible Alpha were expecting Ocado to generate EBITDA of around 171 billion pounds in the year to the end of November. After a 17% drop in its share price on Tuesday, the company is worth around 2.5 billion pounds including debt, leaving it on a 14 times multiple. That's better than most supermarkets, but hardly the tech-style multiple Ocado has enjoyed in the past.

The Kroger partnership is not dead: Ocado says it is engaged in “constructive ongoing discussions” around the further use of its technology. The company's products may also eventually help grocers quickly select products for rapid-delivery services, which are growing in popularity. Order picking-robots still have a future – just not as big and bright as the company once imagined.

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CONTEXT NEWS

Ocado announced on November 18 that U.S. grocery retailer Kroger would close three of its automated warehouses in January. Fee revenue at Ocado will fall by about $50 million in 2026 as a result. The UK company will also receive over $250 million in compensation from Kroger.

Kroger in 2018 identified 20 U.S. sites on which Ocado could build robotic warehouses. Only eight of those have gone live so far, including the three now slated for closure.

Ocado shares fell 17% to 180 pence on November 18. They were trading at 183.8 pence at 1200 GMT on November 19.