With Ocado’s (LSE:OCDO) share price falling over 90% since its high of September 2020, the group’s shareholders are used to bad news. And on 18 November, after the company issued an update on its partnership with Kroger, its market-cap fell 17.4%.
To be honest, due to the group’s persistent losses, I’ve been sceptical about its generous stock market valuation. But even I acknowledge that it’s developed some clever technology. This means there’s probably going to come a time when its share price starts to recover. Are we there yet?
US problems
Kroger is America’s largest grocery chain and it’s been working with Ocado since 2018. Initially, the intention was to create 20 automated distribution centres. But only eight have been opened and the recent announcement that three are to close is a big blow.
As I see it, a fundamental problem is that Kroger’s new approach to meeting its online orders can easily be replicated by others. It plans to use more of its own stores to act as a distribution network. Indeed, Walmart reckons it can deliver groceries to 95% of US households in three hours or less by using its 4,600 stores as fulfillment hubs.
In effect, this is blowing a raspberry to Ocado’s offer. Although it will receive compensation of $350m for the early closures, fee revenue for its financial year ending in December 2026 (FY26) is expected to be around $50m lower.
Personally, I don’t think the financial impact is the biggest issue here. In effect, the group’s receiving seven years of lost income upfront as compensation. Instead, Kroger’s decision raises question about the viability of Ocado’s business model.
Mixed opinions
A retail consultant was recently quoted in the Financial Times as saying that the group’s offer is an “incredibly expensive” way to solve the problem of getting online orders to customers.
Even so, it does have a network of 25 customer fulfillment centres (CFCs) in Australia, Canada, France, Japan, Spain and Sweden.
It also has a joint venture in the UK with Marks & Spencer. And it expects another eight CFCs to go live before the end of FY27. Ocado’s partners are not charities. If the technology didn’t work for them they’d have pulled the plug by now.
My view
In my opinion, the investment case centres on whether there’s a clear path to profitability.
Analysts are expecting EBITDA (earnings before interest, tax, depreciation and amortisation) of £240m for FY25. But due to the huge amounts it’s spent on developing its technology — as well as the large sums that it’s borrowed — the associated ‘I’, ‘D’ and ‘A’ means another post-tax loss is expected. Ultimately, this isn’t sustainable.
And because it takes several years to build a CFC, it’s unlikely to move into the black soon. Although existing sites are expanding – five more live modules are expected before the end of FY25 — the group doesn’t expect to turn cash flow positive until some point in FY26.
But it’s taken over 20 years to get here. And the decision by Kroger has further dented confidence. Therefore, it wouldn’t surprise me if the group’s share price continued to fall in 2026. On this basis, the stock’s not for me.
However, I still think there are plenty of other opportunities to consider in the sector.
