Overview

Ocado Group has announced plans to establish two new customer fulfillment centers (CFCs) in collaboration with Kroger. The centers will be located in Charlotte, North Carolina, and Phoenix, Arizona, with an anticipated opening date in fiscal 2026. Stephen Daintith, Ocado’s Non-Executive Director, shared this information during an earnings call that coincided with the release of the company’s fourth-quarter fiscal 2024 results.

Partnership Developments

The partnership between Kroger and Ocado has faced delays due to various factors, including Kroger’s recent order for Ocado’s Auto Freezer solution. This technology is designed to automate the management of frozen inventory, which has contributed to postponing the opening of the new centers by several months. However, both companies are keen to advance their partnership after a period of stagnation in their development efforts.

Growth and Expectations

During the earnings call, Ocado Chairman Adam Warby acknowledged the company’s performance across its global CFCs but admitted that growth has not met expectations set by the company and its partners. The collaborative efforts between Kroger and Ocado began in 2018, with an initial commitment to build a total of twenty CFCs across the United States. So far, only eight centers have been launched, raising questions from investors about the partnership’s progress.

Communication and Strategy

Despite concerns, Ocado CEO Tim Steiner reassured investors that there is no adverse relationship with Kroger. He emphasized that prior distractions for Kroger have been resolved, allowing both companies to focus on their collaboration. Steiner highlighted the immense potential within the U.S. market and expressed a desire to fully capitalize on this opportunity alongside Kroger.

Current Focus and Future Plans

Kroger’s Chairman and CEO, Rodney McMullen, indicated in mid-2023 that the grocer intends to hold off on developing new e-commerce sites with Ocado until there is a clear strategy for the existing locations. Last year, Kroger announced plans to incorporate additional Ocado technologies, such as On-Grid Robotic Pick and Automated Frameload, into its CFCs, following the opening of three spoke facilities in Texas and Florida.

Performance Metrics and Results

After a series of announcements between 2020 and 2022, Kroger has maintained a relatively low profile regarding its partnership with Ocado. However, the company did report during its third-quarter earnings call that the CFCs have significantly contributed to an 18% increase in delivery sales. The automated centers have attracted a larger customer base and enhanced basket sizes, indicating a positive impact on overall sales performance.

Operational Efficiency

Steiner mentioned that while many of Ocado’s CFCs are performing well, some require improvements or a different strategic approach due to challenges in scaling operations. The successful centers benefit from favorable locations, high customer densities, and suitable target demographics. He further explained that Ocado’s solutions not only streamline operations but also materially reduce labor costs. For instance, an Ocado CFC can fulfill a 45- to 50-item order using approximately ten minutes of human labor—a significant contrast to the hour typically required by traditional store workers.

Financial Performance

For the entire fiscal year of 2024, Ocado reported a 14% increase in revenue, totaling £3.2 billion (approximately $4 billion). Despite recording a loss of £374 million, the company achieved an adjusted EBITDA of £153 million, which is nearly three times that of the previous year. Additionally, Ocado improved its underlying cash flow by nearly £249 million and successfully refinanced £700 million of its debt.

Conclusion

The partnership between Kroger and Ocado represents a strategic effort to enhance grocery fulfillment capabilities in the U.S. market. As both companies navigate the challenges and opportunities within the evolving retail landscape, their collaboration in developing new fulfillment centers is poised to play a crucial role in shaping their future success. With a focus on operational efficiency, innovative technology, and a commitment to growth, Kroger and Ocado are determined to capitalize on the immense potential of the grocery e-commerce sector.