Ocado has reaped a rare financial win after US grocery giant Kroger agreed to pay the British retail technology group $350 million (£276 million) in compensation despite it scrapping another of its automated warehouses based on Ocado’s much-lauded robotic fulfillment technology.
Shares in the FTSE 250 company rose as much as 16% in early trading on Friday before settling almost 7% higher, providing a brief reprieve for a company whose market valuation has slumped from £22bn during the pandemic boom to just under £1.6bn today.
The payout follows Kroger’s decision to cancel the opening of a fourth Ocado-operated customer fulfillment center in Charlotte, North Carolina, one of two facilities previously planned for 2026. The payout came just weeks after Kroger announced it would close three more automated warehouses because they “failed to meet financial expectations.”
Kroger will continue with five remaining locations, plus a sixth scheduled to open in Phoenix next year, but the cut has heightened concerns about Ocado’s ability to scale its technology in the world’s largest grocery market.
What began in 2018 as a vision of 20 warehouses to transform food logistics in the US has only delivered eight so far, and even those have struggled to overcome the huge economic costs of long-distance food delivery in the US.
Despite the growing doubts, CEO Tim Steiner remained optimistic, saying Ocado remained “excited about the opportunity” in the US and was investing “significant resources” into supporting Kroger’s logistics operations.
Ocado said both companies remain committed partners and will focus on increasing profitable volumes across the remaining fulfillment centres.
“If you were a future partner, you would change your mind”
John Hudson of Premier Miton Investors, a firm with a short position in Ocado, was blunt. “It doesn’t look good that Ocado’s largest partner has started closing warehouses. If you were a potential partner in the future, you might think again.”
Shore Capital’s Clive Black went further, warning that Ocado’s credibility in securing future licensing deals had been “absolutely shattered”.
“Any retailer who looks at Ocado’s proposal will read the Kroger report, which essentially says the partnership is commercially unviable,” he said. “It would take a pretty strange form of due diligence to ignore that and not call Kroger, Waitrose, Morrisons or Sobeys and ask why they pulled out.”
Each of these retailers has reduced or restructured their relationships with Ocado in recent years.
The company, long derided as a “jam-morning stock,” has only generated full-year pretax profit once in its 25-year history. The company also faces a key refinancing deadline in 2027, with £350m of convertible notes and a £300m revolving credit facility due.
The joint venture with Marks & Spencer, formed in 2020 after Ocado exited Waitrose, was also under pressure due to missed performance targets and a dispute over true-up payments.
Still, Steiner urged investors to think long-term: “Shareholders should only have invested if they are convinced that we will be a profitable company in the long term,” he said.
For now, the company has secured a much-needed cash injection – but as Kroger cuts its commitment and other global partners give in to Ocado’s model, the question remains: where will future growth come from?
