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Will Ocado’s technology investment pay off for investors in the long term?

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There was no stopping Ocado (LON: OCDO) during the pandemic. Shares in the grocery delivery service more than tripled between the start of 2019 and the height of lockdowns in early 2021. But with the slow return to normality across all regions where the company operates, the US, Canada, UK and Australia, shares have been gradually declining. Ocado stock suffered another hit last week after the grocery delivery service posted higher losses in 2021.

Looking at the net loss alone may be a bit misleading because it obscures the fact that the company is investing heavily in technology which should give it an advantage over competitors in about two to three years’ time by helping it secure its position as one of the lowest cost operators in a densely packed grocery delivery market.

Ocado’s 2021 revenue increased by 7.2% to £2.498 billion, not a small feat given that 2020 was a record year, while EBITDA declined by 19.83%. The grocery delivery business had a much higher net loss this year of £176.9 million, up from a £52.3 million loss in 2020 stemming from investment in new packing and warehousing technology.

Ocado’s already high margin nudged higher to 35.9% as the firm managed to increase order volumes, change sourcing arrangements, and improve its product mix. The company is still growing with customer numbers rising by 22.4% to 832,000 and order numbers increasing 11.9% to 357,000. Ocado said growth could have been stronger had it not been constrained by the ongoing tight labour market in the UK.

Why the new technology investment?

Covid has accelerated a change in online food shopping which would have normally taken place over a few years by dramatically raising expectations for speed and access to online deliveries. Before the pandemic in the US only between 3% and 4% of all groceries were bought online. Now, two years on, this number is above 30%. Two, three or more days for deliveries now seems too long and the expectations are that food will be delivered within the same day, preferably within hours. This increase in speed poses significant logistical challenges, requiring a denser coverage of warehouses and either more manpower or a change in technology. Ocado is opting for the latter.

The company is working on automated fulfilment centres, smaller warehouses redesigned to be more tightly packed and operated by much lighter robots than the current ones. These robots use far less power and work on a smaller grid which makes it possible to build a new warehouse space within weeks, instead of months.


Game changing technological changes

Ocado’s chief executive Tim Steiner said that the changes in technology are a ‘game changer…that could ‘shatter the existing rules of the industry.’

One version of this new technology was first used by Norwegian company AutoStore and Ocado, which is now using a version of it, has ended up in a dispute with the Norwegian firm over patent rights. If Ocado manages to successfully roll out this technology, which is more advanced than Amazon’s, it would lift its business onto a higher level, particularly in North America.

The ultralight robots are already in pre-production mode and have more than half of their parts 3D printed. Chief executive Steiner estimates that using the robotic arms to pick and pack groceries could cut the need for staff by about 50% initially and later on by as much as 80%.

Ocado’s potential advantage, however, won’t last long. Other supermarkets have the same idea and by the time Ocado’s technology has changed, which should be approximately two years from now, it won’t have a first mover advantage for long.

Although a number of analysts noted that Ocado has not signed up any new deals in the UK, this may be less of an issue for the company as the big battle for new customers will more likely take place in the US and Canada where the company already has deals with Kroger and Sobeys.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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