CEO mea culpa on show at Ocado as management concedes its early business model is still delivering consequences today

Retail automation platform provider Ocado hasn’t had the easiest of times when it come to international expansion and never more so than over the past few years when two of its flagship customers, Kroger in the US and Sobeys in Canada, slammed the brakes on their planned rollout of Ocado-powered Customer Fulfilment Centers (CFCs), both citing lack of return on their investment to date.

It’s a difficult one for Ocado to spin, especially when the firm’s approach to overseas adventuring had been to sign up exclusivity deals in the various regions, limiting its room for manoeuvre. Kroger had to be made to work because Kroger was the one Ocado signed up with, and now Kroger didn’t want to follow through on its original commitment to spend, but hasn’t completely terminated the deal. What does that say to prospective clients for Ocado’s offering?

One aspect of this unfortunate situation Ocado created for itself was addressed at the start of this year as the firm tore up its exclusivity policy so as to be able to chase fresh competitive opportunities in areas where it already had a customer deal in place. At the time, CEO Tim Steiner said:

In the five years since our first international Customer Fulfilment Centers went live, we have substantially evolved our market-leading solutions and broadened our offering to meet retailers wherever they are on their online journey. As we enter 2026, Ocado is well positioned to help more retailers capture market share in the world’s fastest-growing grocery channel.”

That was an upbeat message, somewhat undermined a few weeks later when Sobeys decided to shutter another one of its CFCs, this time in Alberta.

Learnings

A month on from that, Steiner picks out some learnings from what has happened:

The critical lesson that we've learned is that you do not buy a large-scale CFC unless you have a business to put through it. They are not a profitable asset if you don't use them. But if you do use them, they're great...that really is the key lesson. Some of the buildings in North America were not being used and those retailers working with us have made the decision to close them.

Steiner has not been shy in handing out ‘tough love’ advice to his customers before now, this time last year warning retailers in the online grocery world that they needed to learn to operate differently if they hoped to succeed. His views here haven’t changed:

I think the key things to make these work and what hasn't been understood before and where people have failed when they've rolled some out and not had the success they wanted for clients is based on a few things. One is just actually their understanding of handling grocery and the variation in grocery, the interaction with stores. And there, we obviously are in 1,000 stores today as well as delivering 72 million orders last year across our platform. So we've got enormous knowledge [where] a number of these players just have got next to none.

Lesson number two, as much for Ocado as for retailers, is that size does matters and bigger isn’t always better:

You want to do this in the smallest possible sites. Cubic storage is the densest storage for the products that you need to store, number one. And we have the solution that can get the highest throughput from a square meter of grid, a square meter of processing, because our bots are faster, accelerate faster, decelerate faster and our control algorithms allow them to work in greater density, and our single space bot patent means that nobody else can achieve the density that we can achieve. So in terms of using the least amount of space to generate the highest potential throughput, we are in the best place.

Historically that hasn’t always been factored in, he admits:

The warehouses we would build today are half the size and 75% more productive than one we would have built three years ago.

What would he have done differently?

Would it have made a difference with the likes of Kroger and Sobeys if Ocado had operated in a different way when those deals were signed? Steiner says:

Would I like to have built the warehouses that Sobeys wants to build in a different sequence so that instead of the third warehouse being in Calgary, should I try to influence management to build it somewhere with a bigger population opportunity with more density that they already had in their network or something? Did we just accept the orders? Yes. Is that, in hindsight, a bit naive? Yes.

But back then Ocado built bigger warehouses with lots more modules and that was what the client was expected to splash out on at great cost:

Economically, we needed them to do because of the CapEx that we have put into those sites, and we needed them to grow. But it was a big outlay, it was a big ongoing cost for the clients if they didn't fill them. We didn't have a strong enough sense they weren't going to fill them, and they haven't filled them, and so hence, they're a drag and a burden. 

We've been aware of the challenges of our early business model, and we've been working on that for the last eight years. We obviously still have to live with the consequences of those early sites and those early decisions.

Flash forward to today and that’s not how Ocado would operate, argues Steiner, or what it would offer:

We need something that is economic for us and our partners at smaller size. We have it today. We need something that our partners can start with the smallest volume and the lowest kind of fixed outlays, and then can they grow it. We're talking to clients about doing this in a more flexible way in terms of their charging and how that works with their growth that are massively useful for them and still work for us.

So we're learning these lessons....If we could have built the warehouses that we've got in a slightly more linear way rather than kind of pushed upfront, then maybe we could have learned some of these lessons earlier and helped our clients. And maybe if some of those seven module warehouses where they were paying us for three modules had only been a three module warehouse and they'd been paying us for one, maybe there would have been a growth path to see that filling up and those would still be open. We're not blameless as such.

Looking to the future, as well as tearing up the exclusivity aspect of its business, Ocado has consolidated Ocado Solutions and Ocado Intelligent Automation into a single point of sales and account management under Nick de la Vega, who joined as Chief Revenue Officer at the end of last year. He’ll be at the forefront of pushing more size-sensitive, cost-effective automation offerings, says Steiner, and getting customers and prospects to buy into the need to change the way the operate in this space:

I think one of the kind of combined naiveties between ourselves and our partners would have been kind of their view of we bought this amazing stuff, and if we just turn it on, we'll have a successful business. Obviously, we've been saying for a while, that's not the case, but we still don't have that element of control where even where we realize it, some of our partners have still behaved a bit like that. [de la Vega’s] very good at getting in there and talking through that challenge and trying to get retailers to realize what they need to do to contribute towards making their business successful and not just a view that because we've written some clever code and we've got some  whizzy robots, that means they've got a business.

My take

So what’s next for Ocado?  Despite the knock-backs from Kroger and Sobeys, the firm hasn’t lessened its North American or wider international ambitions. If anything they seem even greater as Steiner argues:

By 2027...the US grocery market is estimated to be 8x the size it was in 2018...Globally, since we entered into a number of exclusivity arrangements, the global market has more than doubled. And so we are super excited about re-entering a number of markets where we're having some very interesting conversations with a large number of grocers and keeping Nick in his new role very busy. 

For his part, Ocado Chairman Adam Warby pitches what’s happened with Kroger and Sobeys not as bad publicity but “constructive engagement with our partners in North America, as they made decisions to close sites in areas where demand has not evolved as initially expected”. He adds:

While the decisions made in North America to close were difficult, it does reflect a mature approach with those partnerships and putting them on a stronger foundation for long-term and sustainable growth. With exclusivity now having ended in North America, we've begun the journey to reengage in many of the commercial opportunities available in the world's largest grocery market.

Hmmmm....we shall see.