Ocado shares slide after Kroger hints at changes

(Sharecast News) - Shares in Ocado Group fell sharply on Friday, after key US partner Kroger flagged a possible change in direction. Investors were reacting to comments made by Kroger - the UK firm's biggest partner for its warehouse technology - during a second-quarter earnings call on Thursday.

Kroger, which is carrying out a strategic review, told analysts it would take a "hard look" at some of its automated facilities and carry out a full, site-by-site analysis of its existing network.

It also noted it could offer delivery in under two hours from 97% of its shops, and flagged its "conveniently located store network".

As at 1430 BST, shares in Ocado were topping the FTSE 250 fallers board, down 14% at 256.95p.

Neil Wilson, UK investor strategist at Saxo Markets, said: "The comments are clearly a negative for Ocado as Kroger seems likely to move away from the kind of large customer fulfilment centres provided by the British company, and instead seems to be looking to lean on local stores to fill orders."

Morgan Stanley agreed, noting the "negative readacross" from Kroger's comments for Ocado.

According to Bloomberg, the bank pointed to an "increasing risk" that some of Ocado's existing sites with Kroger could be closed, while the heightened focus on store delivery put "a question mark on where the long-term CFC network fits in".

Russ Mould, investment director at AJ Bell, said: "Shares in warehouse automation group Ocado crashed after key customer Kroger said it would undertake a site-by-site analysis of its automated fulfilment network. Kroger also said it was using stores 'very heavily' to fulfil e-commerce orders and implied that was its key focus from now on.

"These comments imply that Ocado might find it harder to sell more automated solutions to Kroger, and that existing agreements might come under review. It's the worst kind of news imaginable for Ocado investors as they've bought into a company which has positioned itself as the technology solution to grocery providers' needs.

"While Ocado has continued to win new contracts, the pace has been erratic. The prospect of existing relationships starting to deteriorate adds another level of risk. Then there is the big question of when Ocado will ever make a sustainable profit."

As well as delivering groceries in the UK in partnership with Marks & Spencer, Ocado sells technology and logistics services to retailers worldwide.

In a series of social media posts on Thursday, Ocado flagged Kroger's strong e-commerce sales during the quarter. It also quoted chief executive Ron Sargent, who said e-commerce remained a "top priority" for the retailer.