A “near knockout punch” was Shore Capital’s Clive Black verdict on Kroger’s decision to close three Ocado tech-powered CFCs.
Last week’s news knocked Ocado’s share price to its lowest in more than a decade. The group will also face the immediate pain of a $50m hit to fee revenue next year.
So where does the blow leave Ocado’s longer-term prospects?
Kroger’s decision is not an isolated incident. Last year, Canadian chain Sobeys put plans for another Ocado robotic warehouse on hold. Morrisons too announced it was phasing out deliveries of online orders from Ocado’s Erith CFC, in favour of expanding its store-pick fulfilment model.
For Kroger, the financials for the CFCs didn’t add up without “higher density of demand”. The verdict from Ocado’s most significant customer is a “devastating blow to the credibility” of its proposition, Black says, and its total addressable market “has been blitzed”.
Richard Brentnall, group logistics director at Nomad Foods, considers the Kroger relationship breakdown “a material signal and not just a one-off adjustment”. That other supermarkets have made similar moves away from Ocado-powered facilities, and chosen to grow online with a store-pick model, “reflects a structural shift, not a temporary wobble”.
“The pattern is becoming clear. Retailers under margin pressure are gravitating toward flexible, lower-capex fulfilment models and stepping back from assets that lock them into long payback cycles,” he says.
Ged Futter, director of The Retail Mind, says: “CFCs are not the future and neither is Ocado. They never have been.
“Ocado have been waltzing around for 25 years and they have generated a lot of noise and even more investment. They’ve not actually done the one thing a business needs to do, though: make money.”
The fulfilment evolution
However, grocers globally are still launching CFCs powered by Ocado’s Technology.
Brittain Ladd, a consultant who advised Kroger on its CFCs deal, says Ocado “may have given itself a black eye” on that front. However, it still has “customers globally who are quite happy with the technology”, he points out.
Indeed, the same week as Kroger’s announcement, Auchan Polska launched its Ocado-powered CFC near Warsaw. Supermarket Bon Preu launched one in Catalonia in June, and Lotte plans to operate a network of six in South Korea.
“Centralised fulfilment isn’t dying, it’s evolving,” says Isabelle Baumann, CEO of Scandinavian grocery logistics firm Oda Systems.
“What’s ending is the era of overly complex mega-sites. They offered massive capacity but also massive running costs, and they needed extraordinary volume to break even,” she says.
Ladd says Ocado should pivot into smaller, cheaper, and quicker-to-build fulfilment sites “inside select stores, attached to the side of stores, or located among a cluster of stores”.
Ocado Group isn’t oblivious to the challenge. Last month, CEO Tim Steiner told a conference that “there isn’t one size fits all” for fulfilment centres, and “we’ve learned how to build them smaller and start them smaller”.
But it has far more competitors than when it launched 25 years ago – many of which are specialising in leaner, simpler solutions.
“This is a moment that will force clarity,” Brentnall adds. “It’s a tough day for Ocado and an inflection point for the future of automated fulfilment.”
No comments yet