The Supply Chain Matters blog updates readers on additional information related to U.S. supermarket retailer Kroeger’s initiatives to leverage Ocado robotics technology in a network of automated online fulfillment warehouses.
In prior Supply Chain Matters commentaries focused on U.S. food and grocery retail industry, we highlighted an initial announcement and subsequent efforts being undertaken by Kroeger, the nation’s largest food retailers, to deploy pick and pack robotics capabilities to be able to boost online order fulfillment capabilities.
In May of 2018 we alerted readers to Kroger’s increased equity stake in United Kingdom based grocery robotics retailer Ocado Technology Group. The grocery retailer invested approximately $247 million, equating to a 6 percent stake in the U.K. technology firm, which is an operating division of food retailing site Ocado.com.
Kroger is licensing Ocado’s unique robotics-based automated warehouse technology to process online orders in a capability termed “anything, anytime and anywhere.” According to Ocado Technology’s web site, the provider’s grocery bots can pick a typical 50-item order in around five minutes.
The Kroeger deal called for the construction and deployment of three new automated warehouses targeted for online customer fulfillment automation, growing to a total of 20 warehouses over three years. The first facility, announced in November 2018, involves a $55 million investment and will reportedly be located in a northern suburb of Cincinnati Ohio.
In a late February blog, we highlighted a supermarket media report indicating that Kroeger had announced two additional facilities beyond that on eventually serving the U.S. Midwest region. Our perspective indicated that there was good and perhaps concerning news relative to the food retailer’s bold online initiative thus far. The good from the perspective that the grocery retailer’s online sales are already growing at a robust growth rate of 60 percent in its latest third-quarter, without any of Ocado’s capabilities.
Industry watchers believe that this technology will allow Kroeger to turn up the heat on competitors for online reach. Concerning in that the three now announced U.S. fulfillment centers have long way to go before construction is completed and systems are tested and made operational. From our lens, the key target is likely the ability to have some form of Ocado capability in-place by the all-important Q4-2019 holiday period.
The Ocado Technology Side
We now know the other side of this ongoing development, namely what the tech provider is doing to marshal resources and deployment capabilities.
The UK based Guardian reported in late February that UK retailer Marks and Spencer will pay Ocado £750m for a 50 percent share of a new Ocado.com joint-venture, which will begin trading in September 2020. The agreement will reportedly provide for both Marks and Spencer food and general merchandise to be available on Ocado.com starting in September of 2020, replacing Ocado’s long-standing deal with retailer Waitrose. Ocado will continue to supply its own-label products and big name branded goods on the platform. The report strongly hinted that Marks and Spencer likely overpaid for access to Ocado’s technology and online distribution capabilities.
This deal was hinted by a prior Heard on the Street opinion commentary from The Wall Street Journal that indicated that Ocado has made a move to shed its 50 percent equity stake in the provider’s retail food delivery services which primarily supplies groceries to consumers in Southern Britain, a joint-venture with United Kingdom’s food chain Marks and Spencer. According to the WSJ report, recognizing that its future resides in licensing and deploying its robotics technology, the financial move reportedly frees-up cash and removes lingering questions about the funding of the 20 eventually expected automated warehouses associated with Kroeger’s initiative. The report indicates that fit-up can cost upwards of $65 million per facility. The other perspective brought forth is that with such levels of investment, U.S. online food sales will need to dramatically increase from current levels of single digit percentages.
In the tech provider’s most recent report of financial performance, investors were warned spending on distribution centers being built for supermarkets would continue to impact profit. Senior management refuted the report that the company would dilute its stake in the retail services business. Ocado has inked deals with three other globally located grocery chains in addition to Kroeger.
Thus, it would appear that success brings its own set of financial scale-up challenges.
This will be online fulfillment area to watch in the coming months.
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