Ocado Group Plc, the renowned online grocer, has seen its market value fall below that of its joint venture partner, Marks & Spencer Group Plc, marking a significant shift in investor focus towards profitability and a slowdown in demand for robotic warehouses.
The shares of Marks & Spencer experienced a notable surge of 7.2% in London on Wednesday, propelling its market capitalization to £3.4 billion ($4.2 billion). The company’s positive earnings report, coupled with its plans to reinstate dividends, contributed to the upward momentum. In contrast, Ocado shares slipped 1.7%, resulting in a year-to-date decline of 36% and bringing its market value to £3.2 billion. This decline raises concerns about its potential removal from the UK’s prominent FTSE 100 Index.
This turn of events marks a significant reversal for Ocado, whose stock experienced a remarkable surge in 2018 following a groundbreaking agreement to construct robotic warehouses and license software to the US supermarket chain Kroger Co. This deal solidified the online grocer’s reputation as a technology company, aligning its valuation multiples with those of industry giant Amazon.com Inc.
The decline in Ocado’s market value has prompted scrutiny from analysts. Andrew Gwynn, an analyst at BNP Paribas Exane, stated, “Investors want Ocado to outline a more defined path to achieve cash-flow break-even that doesn’t rely solely on securing numerous deals.” However, the company declined to comment on the recent decline in its market value.
Despite partnerships with notable entities such as Sobeys Inc. in Canada, Coles Group Ltd. in Australia, Casino Guichard-Perrachon SA in France, and Lotte Shopping Co. in South Korea, Ocado has reported annual losses since 2018. Bloomberg Consensus estimates suggest that the company is not expected to achieve profitability until the fiscal year 2026.
JPMorgan recently lowered its price target for Ocado and highlighted the slow progress in the shift towards more automated warehouses. Marcus Diebel, an analyst at JPMorgan, stated in a recent note, “Established supermarkets currently seem to prefer in-store picking solutions.” This preference for in-store picking solutions poses challenges for Ocado’s strategy.
In an effort to diversify, Ocado has made a foray into other sectors. The company recently agreed to acquire 6 River Systems from Shopify Inc., a move that analysts at Morgan Stanley believe will support Ocado’s aspirations to secure contracts beyond the grocery industry. 6 River Systems specializes in robotic products that provide automated assistance to warehouse pickers, and its Chuck robots are already deployed in over 100 warehouses worldwide.
However, it may take some time before the non-grocery deals materialize, placing additional pressure on other aspects of Ocado’s business. Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, remarked, “Investors are growing impatient with Ocado Solutions, which was expected to be the long-term powerhouse of the company. The demand for robotic warehouse solutions remains weaker than anticipated, while the core customers of Marks & Spencer appear to be more resilient amid the prevailing cost-of-living crisis.”
With shifting market dynamics and evolving investor expectations, Ocado finds itself at a critical juncture. The company will need to reassess its strategies and identify new avenues for growth to restore investor confidence and regain momentum in the market.