The decision by Canadian retailer Sobeys to pause the development of a fourth automated warehouse, powered by Ocado, is a "massive blow" for the online retailer and technology group, Dan Coatsworth, investment analyst at AJ Bell has said.
According to Coatsworth, it's a case of "one step forward, three steps back" for Ocado, with the positive news earlier this week that it was the fastest-growing grocer in the UK for the fourth month in a row overshadowed by Sobeys announcement.
The planned customer fulfilment centre, or CFC, for short, was due to open in Vancouver in 2025.
'Disastrous' For Ocado
"The decision to halt expansion is disastrous for the UK partner," Coatsworth said. "It’s no wonder Ocado’s shares slumped on the news as the dominoes are starting to fall.
“It puts a spotlight on an underappreciated risk – what if other customers also slow down or halt their expansion plans? This is already in motion as Kroger said in March it would close various Ocado-powered sites in the US. Bad news comes in threes, so the market is now worried about who could be next to derail Ocado.
“The stock fell to a seven-year low as today’s news piled onto existing market concerns about the company’s growth prospects. All the share price gains generated by the hype around Ocado supposedly revolutionising the grocery sector have now been wiped out."
Ocado has signed a number of deals with retailers around the world seeking a "structural shift", with each CFC using robots to automate picking procedures and support the growth in online orders.
However, this opportunity, according to Coatsworth, "didn’t materialise as expected and Ocado has only managed to sign up a few new deals in recent years, despite the pandemic demonstrating the need to have strong systems to support online demand.”
'Bad News'
Elsewhere, Bernstein analyst William Woods said that Sobeys' decision was "bad news for Ocado as Canada has been performing well and adds to another partner who is pulling back (alongside Kroger and problems at Coles).
"We think this is related to the weak rebound in online volumes across all markets which is challenging the unit economics of ramping the CFCs."
