Is Ocado the Future of Groceries and does it Make Money?

The best value investment for the future of groceries is not Walmart, Amazon, Kroger or Target, instead it might be the Ocado Group PLC (LON: OCDO).

The Ocado Group is a value investment for the future of groceries because it provides the technology and logistics that make online grocery delivery possible. Ocado operates automated fulfillment centers or warehouses and an online grocery service similar to Instacart in the United Kingdom.

Ocado claims to operate the world’s most advanced automated warehouses for online grocery service. If just half of Ocado’s claims are true, this company is a potential threat to both Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT).

Ocado claims to process 260,000 orders a week with an order accuracy rate of 99% and an on-time delivery rate of 95%. The company claims to reduce costs with a 0.7% rate of product waste, which sounds hard to believe.

The World’s Most Advanced Fulfillment Centers

What’s truly interesting is that Ocado might be ahead of Amazon in its use of robots to move groceries. Ocado claims to have 1,100 robots at work in its newest Customer Fulfillment Center (CFC3) in Andover, Hampshire. Pictures online show Ocado robots working in refrigerated warehouses and giant freezers.

Those robots can supposedly pick and pack an order of 50 items in just five minutes. That is amazing because the CFC3 is stocked with 50,000 items, and the center itself is the size of three football fields.

The company employs several advanced technologies to power its Ocado Smart Platform including artificial intelligence (AI), predictive analytics, machine learning, and agile processes. The Smart Platform the software that operates the Fulfillment Centers. The platform operates everything in the fulfillment centers including the robots which can be controlled down to a millimeter level.

The CFC3 took five years to design and build. It is supposed to be a prototype for hundreds of such centers all over the world. The key to the center’s operations is really good wireless technology that allows the mart platform to operate all the robots.

Kroger, Instacart and Ocado might bring Grocery Delivery to 40 million households

It is easy to see why Kroger (NYSE: KR), America’s largest standalone grocer decided to buy 6% of Ocado and sign a deal to build 20 CFCs in the United States. Kroger’s Chief Financial Officer (CFO) Mike Schlotman even believes the CFCs; which he calls sheds, will help his company expand to new areas of the companies, CNBC reported.

“We would have the expectation that these sheds will turn up in areas where we don’t have brick-and-mortar today, where the population may be more dense; and home delivery is a bigger piece of the business, and a way to get in business in parts of the country where we aren’t today,” Schlotman said at the BMO Capital Farm to Market Conference. “And then perhaps figure out what brick-and-mortar you may need to supplement that.”

Schlotman thinks Ocado can help Kroger expand into large U.S. cities like New York, Boston, Philadelphia, and Miami where it has no supermarkets. Ocado might help Kroger grow its business in Chicagoland where its presence is fairly small. One advantage Ocado can provide is to power urban grocery delivery.

Kroger is making a huge grocery delivery push in the United States with Instacart’s help. The grocery giant hopes to offer delivery service or curbside pickup to 40 million customers or two thirds of its market in the near future, Chief Digital Officer Yael Cosset said.

Kroger currently offered delivery from 872 or around one third of its 2,782 stores in March 2018 a press release stated. Curbside pickup of online grocery orders was available at 1,091 stores. The company wants to expand those services to another 500 stores by the end of 2018.

Press releases did not say if Instacart drivers will pick up orders at Ocado operated Kroger warehouses but that sounds like the plan. There is no indication Ocado will bring its online supermarket to the USA, instead the company will probably work through Kroger.

Is Ocado a Value Investment?

Ocado might be the value investment in online groceries because it is publicly-traded on the London Stock Exchange (LSE), unlike Instacart. More importantly, Ocado works on the unsexy side of the grocery delivery business the public does not see it provides the infrastructure that makes delivery possible.

This is a classic value investing strategy that Warren Buffett has long followed: buy the infrastructure that makes a business possible. Like Berkshire Hathaway (NYSE: BRK.H) subsidiary McLane, which provides a wide variety of goods and services to convenience and discount stores and fast-food joints.

Ocado is poised to cash in on online groceries no matter who delivers them because it provides the robots, fulfillment centers, AI, software and cloud needed to power delivery. Its only real competitor might be Amazon (NASDAQ: AMZN); which Kroger, Target (NYSE: TGT) which owns Shipt, Lidl, Trader Joe’s, Safeway, Costco Wholesale (NASDAQ: COST), Aldi, Publix, Albertsons, HEB, etc. are not going to work with.

Is the Ocado Group Making Money?

Ocado Group PLC (LON: OCDO) is well worth taking a look at for those investors willing to dabble in British stocks. The company is not making money but its revenues are growing according to Google Finance.

Ocado reported a loss of -£3.35 million (-$4.46 million) on revenues of £375 million ($499.27 million) for 2017, Google Finance reported. Revenues at Ocado grew by 9.2% during 2018 but its profit margin fell by 281.63% dropping to .89%. The operating income fell by 74.07% to £1.4 million ($1.86 million) in 2017.

Ocado did finish 2017 with some money in the bank, namely £150 million ($199.71 million) in cash on hand. Ocado’s cost of revenue increased by 9.45% to £246.75 million ($328.52 million) over the course of 2017.

That indicates Ocado lacks the resources to roll out its technology worldwide. Therefore it will need a deep pocketed ally like Kroger; which reported $122.66 billion (£92.13 billion) in revenues for the year that concluded on 30 January 2018.

Ocado is a Future Value Investment in Groceries

It is also why Ocado has teamed up with Swedish grocery chain ICA, Canada’s Sobey’s, and France’s Groupe Casino, The Financial Times reported. Picking local partners is a smart strategy because the grocery business varies drastically from country to country and from region to region.

Partners like Sobey’s, ICA, Groupe Casno, and Kroger have the know-how tap local grocery markets. All Ocado will need to meet their needs is a lot of cash. The company will run out of money next year with its current rate of revenues, The Financial Times calculated.

Ocado is currently a risky speculative play but its technology and business plan have great value potential. Those willing to pay Ocado’s price which was a high £886.6 on 25 May 2018 might reap big rewards. Value hunters might be better served by Kroger (NYSE: KR) which was trading at $24.61 a share on the same day.

Either way, Ocado is well-positioned to profit from online groceries, and give Amazon a serious run for its money. If you are looking for a future value investment in groceries, Ocado is probably it.

This story originally popped up at Market Mad House — your barometer for retail insanity and technological unemployment.

Daniel G. Jennings is a writer who lives and works in Colorado. He is a lifelong history buff who is fascinated by stocks, politics, and cryptocurrency.

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