Ocado’s all time high supermarket sweep

At Ocado’s [OCDO] packing facilities it takes just five minutes to put together a grocery order. In the warehouse, shopping baskets whizz around like a giant scalextric, while bumper car like robots pick and pack items. In the development lab, soft, humanoid hands are even in the works to handle delicate items like fruit and bread.

It’s both a futurist vision, with mechanical workers outnumbering human ‘colleagues’, and a testament to how far Ocado has come. The retailer, which launched with its online grocery shopping platform in 2000, has struggled for years to make a profit. As recently as 2016, it was the UK’s most shorted stock. But that’s all in the past.

Ocado’s sudden rise has in fact been slowly and surely in the works since its IPO on the London Stock Exchange in 2010. Rather than being another online grocery shopping site, akin to Sainsbury’s or Tesco’s web offerings as it was once seen, the company has become a highly advanced logistics firm. It now believes the speedy packing technology it has meticulously developed will be the flagship revenue generator.

And it looks like the firm will be vindicated: in May 2018 a game-changing partnership with US-based Kroger [KR] was announced, sending Ocado’s shares skyrocketing by 45%, adding £1.6bn in value to the business. The rise propelled it onto the FTSE 100, while Goldman Sachs upgraded its advice on the stock to ‘buy’.

Kroger is the biggest supermarket in the US, and the second biggest retailer after Walmart. The push will see Ocado open 20 automated warehouses across the US in the next three years, with Kroger owning a 6% share in the business.

Announcing the deal, Ocado’s chairman and co-founder, Tim Steiner, said: “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…the deal will reshape the food retailing industry in the US.”

“[The deal is] a huge opportunity to redefine the grocery experience of Kroger's customers and create value for the stakeholders of both Kroger and Ocado” | Ocado chairman and co-founder, Tim Steiner

The signs have been there: Ocado launched a partnership to facilitate deliveries with UK supermarket Morrisons in 2014, becoming profitable for the first time the following year. Since November 2017, the firm has been on a deal-making spree, striking international partnerships with retailers in France, Sweden and Canada that want to utilise the high-powered warehouse tech.

Amazon, meanwhile, another major player in the warehousing and logistics space, has been keeping a close eye on Ocado’s progress. There have long been rumours that Amazon is interested in acquiring its own stake in the company, while market pundits have suggested that Kroger’s deal with Ocado is a way to keep the e-commerce juggernaut at arms length.

It’s certainly been a rocky ride for Ocado. The IPO was a flop, with it’s price range first slashed from 200-275p per share to 180-200p and it trading as low as 55p in 2011. But the hard times appear to be over, and since May 2017 Ocado’s share price has climbed by almost 170%, with it now sitting above 1,000p per share.

Such runaway growth naturally raises questions on whether the future will continue to be so bright. Analysts at Goldman Sachs have however suggested that there is a healthy market opportunity for Ocado in the US; estimating that it could eventually double the number of warehouses initially agreed with Kroger.