Ocado puts brakes on expansion as online grocery demand eases

Ocado has told investors it will pause the construction of more automated distribution centres in the UK, the latest sign of a pullback in demand for online grocery delivery.

In a recent presentation to analysts it said two new “customer fulfilment centres” (CFCs) scheduled to open in 2024 and 2025 would be delayed.

“We’ve taken the decision to pause the north-west and south-east CFCs,” chief financial officer Stephen Daintith said. “That may change, it’s a pause not a stop, but we think it’s a sensible thing to do given the surplus capacity we have today.”

The decision means the sales capacity of Ocado Retail, the joint venture with Marks and Spencer, will now reach £3.9bn in the medium term, rather than the £4.5bn previously planned. Its sales last year were £2.3bn.

The company had already warned it might not accelerate a capacity expansion programme put in place after its existing facilities could not be ramped up quickly enough to capitalise on booming demand during the Covid-19 pandemic.

Now the pandemic has waned and many shoppers have returned to stores, it has the reverse problem. It expects sales to fall this year for the first time in its history and having opened new warehouses in Essex, Bristol and Luton, it has more capacity than it needs.

Ocado reiterated that it did not intend to sell its half-share in Ocado Retail to M&S to raise funds. “That is not an option we are seriously considering,” said Daintith. “Right now at the reduced margins . . . would not be a sensible time to sell that business.”

Some analysts are questioning whether the slowdown in the UK might affect Ocado’s international solutions business, which sells its technology to other food retailers.

The company has agreed to build more than 60 CFCs for customers such as Kroger in the US, Aeon in Japan and most recently Lotte in South Korea. The expected future cash flows from running these underpin Ocado’s £5.4bn market value.

“If [Ocado clients] are unsure where online demand is going and about the profitability of CFCs, it is surely safer to stick to in-store picking,” said Andrew Gwynn at Exane BNP.

He noted that users of Ocado’s technology paid based on capacity availability rather than actual order volume.

Ocado does provide technology to facilitate in-store picking, which is much less efficient but uses existing store infrastructure and can quickly adjust to changing demand. But it is believed to be lower margin for the company than operating automated CFCs.

The company’s supporters said the recent disclosures had reinforced their views that the technology rollout would generate substantial profits and cash in future years.

William Woods at AllianceBernstein said company guidance on future revenues and profits for the solutions division had been nudged higher and Ocado had reiterated that it did not expect to have to raise new funding.

He added that higher inflation and a stronger dollar could boost revenue and profit should they persist.

There is a huge variation in target share prices among analysts. Gwynn has a target of £3.90, 40 per cent below Ocado’s current share price, while Nick Coulter at Citi has valued the shares at £29 each, just above the pandemic-era peaks they reached in late 2020 and early 2021.

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