High-Tech Grocery Stock Delivers More Food, Less Profit

Ocado is helping to build highly automated warehouses for major supermarkets like Kroger KR 1.86% and Canada’s Sobeys to make their grocery e-commerce businesses more efficient. Once these fulfillment centers are up and running, Ocado collects fees based on the amount of capacity they deliver. Revenue from this part of its business quadrupled in the year through Nov. 28.

In a long-running theme for the stock, though, shareholders have been wrong footed by how much investment is required to fund the growth. This year, Ocado will open eight new warehouses overseas for the supermarket owners that have signed up for its service. Its capital expenditure bill will be £800 million, equivalent to $1.08 billion, as it tries to get these facilities up and running. Losses in the international business means that group earnings before interest, taxes, depreciation and amortization will only be around £55 million this year, according to UBS estimates—behind the £92 million that analysts were expecting.

Ocado is trying to reduce its bills. Last month, management launched new innovations such as a lighter robot for picking grocery orders that is cheaper and faster to manufacture. Robotic picking arms and other automation measures could slash labor costs in warehouses by up to 30%, Ocado thinks. This should appeal to its clients, given labor shortages in some markets.

For now, though, the company has to contend with the same low-tech headaches as its customers. Sales growth in Ocado’s retail arm, which operates as a joint venture with British grocer Marks & Spencer, was constrained by the difficulty of hiring staff. Drops per van a week fell to 177 in 2021, compared with 184 a year earlier, as some of its vans lay idle for lack of drivers.

Ocado’s shares have lost a quarter of their value this year and are now trading at around their pre-pandemic price. The stock has underperformed those of traditional supermarkets, delivering annual total shareholder returns of just 4% in dollar terms over the past two years. Kroger managed 29% and even one of Europe’s weakest names, Carrefour, returned 10%.

Ocado probably has the most advanced online-grocery offer in the world and the pandemic has only made its focus on automation more attractive to supermarkets. But the past two years have also shone a harsher light on the company’s business model. Investing in cutting-edge technology in a low-margin industry is tough to square with the goal of delivering profits to shareholders.

Write to Carol Ryan at [email protected]