Buffeted by criticism from partners on both sides of the Atlantic, Ocado Group Plc’s founder Tim Steiner remains adamant that his robot-operated warehouses are worth the investment, even if customers currently aren’t quite as keen.
(Bloomberg) — Buffeted by criticism from partners on both sides of the Atlantic, Ocado Group Plc’s founder Tim Steiner remains adamant that his robot-operated warehouses are worth the investment, even if customers currently aren’t quite as keen.
“Our clients at the moment are rolling them out not as fast as we would like but we’re working on that,” the former Goldman Sachs Group Inc. banker said in a phone interview. He was speaking just before he flew to Ohio to meet Kroger Co., his biggest customer, which paused the rollout of any new warehouses earlier this year.
Ocado is working with the US grocer to improve the performance of the existing facilities. If Steiner does that, and gets more orders for warehouses billed as the future of online grocery fulfillment, then there’s potential to generate “insane margins” when they are up and running, according to one bondholder, who asked not to be identified as he wasn’t authorized to speak publicly.
Getting there is the challenge. After raising more than $4.5 billion since 2017 through various means, Ocado has struggled to meet the CEO’s grand ambition of becoming the “Tesla of grocery.” Instead, the company’s current spending rate and a looming debt maturity mean it’s going to need to take a much more prudent approach with its cash burn rate, according to Bloomberg Intelligence and the bondholder.
With the other strands of the business — a grocery delivery venture with Marks & Spencer Group Plc and a distribution unit — also under pressure, the heat is on to deliver a growth story to sell to investors.
Steiner said he isn’t worried. Ocado probably has enough cash to pay down a £600 million ($725 million) convertible bond that’s due to mature in 2025 if needed, and even if that doesn’t leave “much of a cushion,” the company will be burning through significantly less cash by the time the bond matures, he said. In July, Ocado indicated that its cash flow will improve by £200 million by the end of current fiscal year.
Steiner also said his shareholders are still willing to stump up cash as they have repeatedly done for the past two decades.
“If I suddenly turned round and said ‘Kroger has ordered 20 more sheds, that they want delivered over an 18 month period and as a result we need an extra £300 million or £400 million on our balance sheet,’ trust me, I guarantee you, our stock would double before the end of the day,” he said.
Dubbed ‘Project Endeavour,’ Ocado’s efforts to improve the performance at its warehouses for Kroger is vital for the UK company. Kroger is seeking to acquire the US chain Albertsons Cos, which would dramatically expand its footprint, raising the potential for the technology provider to provide many more centers.
Kroger CEO Rodney McMullen said last month there’s “a lot of work to do” on the Ocado partnership. For Ocado, that task now falls to John Martin, the former chief executive officer of British-American infrastructure and construction product supplier Ferguson Plc, who started last month as Ocado’s warehouse chief and traveled with Steiner to the US last week.
Ocado is currently focused on improving the efficiency, including the time it takes to pick grocery items, at Kroger’s warehouses, the company’s Chief Financial Officer Stephen Daintith said at an event hosted by Bernstein last week.
Convincing Kroger to order more warehouses in the next year will be key, William Woods, an analyst at Bernstein said in a call with Bloomberg. “To continue to believe in the long-term growth of this you need to see Kroger changing its language and say ‘This is working, we’re happy, we want more,’” he added.
Martin’s inbox isn’t only filled with Kroger concerns. Ocado is also facing a one-year delay in opening a Melbourne-based warehouse for Australian supermarket Coles Group Ltd. after construction issues. Coles’ estimated cost for the centers has risen by about 167% to about A$400 million ($252 million).
Since Steiner co-founded Ocado in 2000, he has unsurprisingly been a fierce proponent of automated technology to power online grocery shopping. That’s been challenged since the pandemic as supermarkets such as Tesco Plc and J Sainsbury Plc use staff and store space to scale up online delivery. Ocado Retail – the UK joint venture with M&S, which is meant to showcase what a success its online model can be – has also been a disappointment.
M&S is not happy with the venture’s performance and there’s work to do to fix it, the retailer’s Chairman Archie Norman told investors earlier this year. The two companies are locked in negotiations over a final deferred payment for Ocado Retail, which has barely grown its market share since before the pandemic.
“People have been knocking Ocado for donkey’s years,” the company’s previous Chairman Stuart Rose said in an interview. “Ocado has been here for 20 years and it will be here in the future. It’s a good business.”
Relationships with all Ocado’s partners remain healthy and another deal is likely in the not too distant future, Daintith said.
Ocado’s stock tumbled last month after it was downgraded by BNP Paribas Exane analyst Andrew Gwynn, who said the exit of Martin’s predecessor Luke Jensen “does not point to an over-flowing order book.”
The company, one of the most shorted stocks in London, reported a pretax loss of almost £290 million in July, even as it said the technology business had been profitable for the first time. One of the bonds issued by the firm was trading at levels more associated with distressed companies earlier this year before rallying as the wider market rose on economic optimism.
Ocado did secure a major victory in August when Norwegian rival Autostore Holdings Ltd. was ordered to pay the British company £200 million to settle a global patent dispute. There are also some early signs of improvement at Ocado Retail as price-cutting and closer collaboration with M&S start to pay off.
Read More: Ocado Joint Venture With M&S Finally Shows Signs of Improvement
Steiner’s firm still has plenty of supporters too. “We think Ocado is one of the most misunderstood companies in our portfolio,” said Claire Shaw, portfolio director at Baillie Gifford, Ocado’s largest shareholder. She said there’s a demand for “some sort of proof” that its warehouses offer the best solution for online grocery deliveries which meant there was “little buy-in from the market for its vision.”
Prioritizing profit will be key in the short term as rising interest rates make it harder for Ocado to finance new warehouses, said Clive Black, an analyst at Shore Capital. “The free money tree has probably lost most of its leaves,” he said.
For Steiner and Ocado, however, Kroger is the focus for now. “I’ve got meetings, I’ve got lunches,” said Steiner of his Ohio trip. “I’ve got everything going on with the senior team there.”
–With assistance from Angus Whitley, Brendan Case and Eleanor Duncan.
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