Ocado has confirmed that its Canadian partner, Sobeys, is shutting down a robotic warehouse in Calgary, dealing another significant blow to the UK online delivery group's business model and international expansion plans.
Share Price Plummets Following Announcement
Shares in Ocado plunged by almost 10% on Thursday following the announcement that Sobeys would be closing the Calgary facility. The decision was attributed primarily to the slower-than-expected growth of the Alberta grocery e-commerce market and its limited size compared to initial projections.
Second Major Setback in North America
This development comes less than three months after Ocado's US partner, Kroger, closed three similar facilities, which wiped nearly a fifth off the UK company's market value. These consecutive setbacks highlight the challenges Ocado faces in establishing its technology-driven model in North American markets.
Ocado's Business Model Under Scrutiny
While many UK consumers recognise Ocado as an online grocer, a substantial portion of its business revolves around licensing its proprietary software and robotics technology, known as the Ocado Smart Platform, to other companies worldwide. This technology enables partners to operate their own automated delivery operations.
The company's primary growth strategy has been centred on securing international deals to supply its online shopping technology. However, it faces increasing competition from rival providers, while many retailers are shifting focus toward fulfilling orders directly from physical stores—a more flexible and often more cost-effective approach.
Continued Operations in Other Regions
Sobeys will continue to serve customers through its Voilà online grocery service using two existing customer fulfilment centres (CFCs) equipped with Ocado technology in the Greater Toronto and Montreal areas. Plans for an additional site in the Vancouver region remain on hold indefinitely.
Executive Response and Financial Implications
Tim Steiner, Chief Executive of Ocado Group, commented on the situation, stating, "Sobeys is an important partner to Ocado, and we have taken a pragmatic approach to refining the network and placing our partnership on the right footing. Online grocery in North America has continued to develop, and Ocado's technology has evolved significantly since our first CFCs were launched in the region."
He added, "The changes we have made in our relationships with both Sobeys and Kroger represent a reset of our North American business, placing those partnerships in the best position to secure long-term growth, while reopening a substantial market for Ocado's much evolved technology."
Ocado expects to receive approximately £18 million in compensation during the current financial year for the closure of the Alberta CFC. However, this closure is projected to reduce the company's fee revenue by £7 million annually.
Ongoing Financial Challenges
The latest setback occurs as Ocado continues to report financial losses despite experiencing growth in sales. For the six months ending 1 June, the group reported a 13% increase in revenue to £674 million, but recorded a loss of £137 million before accounting for one-off items, including gains from the valuation of its joint retail venture with Marks & Spencer.
Analyst Concerns and Competitive Pressures
Some industry analysts have raised concerns about the economic viability of Ocado's large-scale, robot-operated customer fulfilment centres in developed economies like the US and Canada. These doubts could potentially limit the scope of the company's future expansion efforts.
Furthermore, Ocado's model faces stiff competition from delivery platforms such as Deliveroo and Uber Eats, which utilise smaller vehicles like bikes and mopeds to make deliveries directly from stores, offering greater flexibility and often lower operational costs.
Future Technological Adaptations
The remaining Sobeys delivery centres are planning to adopt Ocado's new Swift Router system, designed to enhance efficiency and enable a higher proportion of same-day and short-lead time orders. This move indicates ongoing collaboration between the two companies despite the Calgary closure.
