Ocado failing to deliver on its potential as one of UK’s great technology hopes

Only six years ago, the boss of Ocado Group was writing the obituary for supermarkets as he predicted that a surge in online grocery shopping during the pandemic had brought forward the hi-tech future.“Not every store will disappear, but there will be a dramatic shift,” Tim Steiner said at the height of the Covid pandemic, when shopping from the sofa became the only option for many.Fast-forward to today and the prospect seems distant as the UK grocery technology group again slashes jobs as it battles heavy losses.Shares in the group slumped more than 6% to 220p on Thursday, as it revealed worse than expected annual losses and 1,000 job cuts, half of which are in research and development. At that price, shares are 22% above Ocado’s stock market float price of 180p in 2010 and a staggering 90% lower than their pandemic peak. It has rarely made a profit since it was founded a quarter of a century ago.The company, once one of the UK’s great technology hopes, has suffered setbacks in terms of taking its technology to new clients and has had to rein in ambitions on that front.Kroger, a major partner to Ocado in the US, announced last November it was closing three warehouses using the UK company’s equipment. Two months later Ocado revealed its Canadian partner, Sobeys, was closing its Calgary facility.Steiner admitted to the Guardian on Thursday that “the market for large automated distribution centres in the US is smaller than we thought it would be”.A robotic picking machine inside an Ocado warehouse in Erith, south-east London. Photograph: Paul Childs/ReutersOne member of Ocado staff said workers had been told that some Ocado technology offices – which span from Hatfield, Welwyn Garden City and central London to Bulgaria, Poland, Spain and Canada – were likely to be closed or significantly downsized.The worker said they had not been told exactly which jobs would go and “communications are very unclear, putting people under a lot of stress”. “Before Covid, what we were building was absolutely at the front row in logistics. During Covid, there was huge expansion and we lost technology leadership,” they said.Several rounds of redundancies in recent years meant “morale is dropping”, they said. “Prospects are more uncertain and a lot of competitors are appearing.”Ocado’s retail joint venture with Marks & Spencer may be the UK’s fastest-growing grocer but only about 13% of groceries are bought online in the UK according to Worldpanel by Numerator, with about a fifth of us choosing that option.The online grocery market continues to grow but there is hefty competition for those sales and Ocado’s technology is not necessarily the first choice for retailers trying to take their share.Grocers around the world are finding that large distribution centres, even those run super-efficiently with robots, are an expensive and inflexible option for managing deliveries. Instead they are turning to the likes of Deliveroo, Just Eat and Uber Eats who are all competing to manage swift deliveries from stores.Big operators such as Tesco and Sainsbury’s have built their own grocery delivery networks with a combination of hi-tech warehouses, store-based distribution hubs and picking directly from shelves.Ocado’s model requires hefty upfront investment and often a long road to profitability, with money tied up in automated warehouses, state-of-the-art robots and refrigerated vans. It works well in high-density cities where there is consistent requirement for home deliveries but it struggled to scale up rapidly during Covid, for example, when demand rocketed.The alternative is cheap, using spare space in stores to hold and sort product or picking items straight from supermarket and convenience store shelves. These operations can also expand and contract with ease to reflect consumer demand given its reliance on a usually self-employed army of bike riders and existing store staff.Chris Beauchamp, the chief market analyst at the share trading platform IG, said: “Ocado continues to be one of the most impressive vehicles for shareholder value destruction we have seen. For a company once seen as the future of supermarket delivery, its fate has been to be overtaken by its more pedestrian, but larger, rivals utilising their size and reach and building on their existing business to tell a much more compelling story for investors.“Rather than use Ocado’s technology, they have instead built their own and simply bypassed the newcomer, leaving Ocado as the great white elephant that failed to deliver.”Steiner counters that demand for Ocado technology is “bigger than ever” as the company can put smaller-scale versions of its robotic equipment into local stores to help make picking and packing groceries more efficient. He said this could work alongside delivery aggregators such as Deliveroo, Amazon and Just Eat, which pick up products from stores. A similar model is being tested by its client Morrisons in the UK.“We have the designs and we are taking it to our clients at the moment,” Steiner said. “The market is evolving and we are evolving. The market is huge. It is complex and it is not always a straight road but we are in good shape.”But Tintin Stormont, an analyst at Deutsche, said ultimately investors “want to see Ocado maximise monetisation of the innovations it has developed”. “We believe the stock is in a ‘show-me’ phase till this happens.”