Online retailer Ocado is facing higher than anticipated costs and further losses in the short term, as it grapples with a shifting business model that will see the company provide robotics and warehouse solutions to rival retailers. The forecast follows the group’s reported pre-tax half-year loss of £9 million.
Selling groceries is an increasingly competitive business with small margins. The entry of discount chains Aldi and Lidl into the UK and their rising market share – peaking at 7.3 and 5.3 percent, respectively, in the first quarter of 2018 – has only exacerbated the challenge.
Ocado banking on the future
In fact, Ocado has only achieved a pre-tax profit in two of the past 17 years, which goes some way to explaining why the online grocer has decided to shift towards becoming a technology supplier to the retail industry.
Ocado has invested heavily in automating its fulfilment centres and developing robotics technologies to be used in retail warehouses. And that trend is set to continue. The company will invest £210 million this year, up from £160 million in 2017.
Ocado’s technologies combine the cloud, AI, robotics, and the IoT to automate warehouse operations and speed up the packing process.
So far, the group has agreed five deals to build and connect warehouses retailers worldwide, including the setup of 20 customer fulfilment centres for US supermarket chain Kroger, announced in May.
At the time, CEO Tim Steiner was bullish about Ocado’s potential to change the shape of retail. “Ocado’s unique, proprietary, and industry-leading technology is set to transform the shopping experience of consumers around the world,” he said.
Our success as a retailer shows that we can offer customers unrivalled choice, quality and convenience, efficiently and profitably. The opportunity to partner with Kroger to transform the way in which US customers buy grocery represents a huge opportunity to redefine the grocery experience of Kroger’s customers and create value for the stakeholders of both Kroger and Ocado.
“As we work through the terms of the services agreement with Kroger in the coming months, we will be preparing the business for a transformative relationship which will reshape the food retailing industry in the US in the years to come.”
Short term losses expected
In the earnings report, Ocado admitted that adjusted earnings from its solutions division – the department that focuses on developing, building, and licensing robotic warehouses – would decline in the short term as more investment is made in the technologies.
However, Steiner pointed out that while Ocado has to spend a significant amount to build facilities for other retailers, logistics technology has the potential to be far more profitable than Ocado’s core grocery business in the long run. “When selling technology, clearly you make a significantly different profit margin to selling kale,” he said.
He confirmed that Ocado would benefit from recurring revenues from its international deals with retailers “in 18 months to two years”.
Internet of Business says
As Ocado continues to suffer from the UK’s growing attachment to Lidl and Aldi, it makes sense to divert its focus to its Ocado Technology and Ocado Engineering divisions.
Other retailers face a similar need for greater efficiency and cost savings, and they will increasingly seek the company’s expertise.
The lack of profits throughout its history reflects the fact that Ocado is playing a long game – similar to Tesla’s progress in electric vehicles over a similar timeframe. Many technology companies, including the likes of Amazon and Tesla, willingly forgo short-term profits to build businesses that pursue innovations that will enable them to dominate their industries in future. This isn’t lost on investors: Ocado’s share price has more than doubled in value this year.
The company isn’t resting on its laurels either. The retailer has just decided to create the Ocado Smart Platform (OSP) Machine Learning Services (MLS) team, with the goal of evangelising and enabling machine learning techniques within its platform and providing “machine intelligence for all”.