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Analyst: Ocado's solutions business needs investment to scale

12 July 2019

The internet retailer Ocado is continuing its evolution into a logistics technology provider, but Thomas Cullen of consultancy Transport Intelligence cautions its solutions business is still loss-making and needs investment.

In its latest half-year results released earlier this week, Ocado’s co-founder and CEO, Tim Steiner, said that in the “last six months the centre of gravity at Ocado Group has shifted….we are beginning to apply our technology skills and expertise to other related activities which we expect to be of benefit to our Solutions partners as well as to other Ocado Group stakeholders.”

The company now provides e-commerce logistics platforms for a string of grocery retailers in North America and Europe as well as its own UK operations. The latest was an announcement of a new fulfilment centre for the Canadian retailer Sobeys.

Thomas Cullen of Transport Intelligence explains: “Essentially what Ocado are trying to do is to create a series of internet retail brands, such as its new joint venture with Marks & Spencer, which it supports through its automation and artificial intelligence technology. Of course, most of its customers are independent retailers, notably Kroger in the US. However, the underlying logic appears to be that Ocado’s technology is so powerful that even its retail customers are dependent on it to achieve their internet retail objectives.

“Yet despite Mr Steiner’s understandable ambition, it remains the case that in revenue terms Ocado is still dominated by its own-brand grocery retailing business. For the first half of 2019, the retailing business had a revenue of £811.5m whilst the ‘Solutions’ technology operation saw only £70.8m. The ‘Solutions’ business is still loss making and will require continuing capital investment.”

Ocado is the leading technology rival to Amazon for the provision of e-commerce technology. Its growth has been impressive and it has an impressive list of customers. Tim Steiner says that it is discussing more opportunities with retailers around the world but he says he needs to ‘select and prioritise the most attractive of these opportunities’. 

Cullen adds: “However, it still has not quite achieved the scale that it needs to establish itself as major global player in e-retail technology. Despite the contract with Kroger, Ocado is still heavily exposed to the UK so it will be interesting to see who the new customers for its technology will be and whether they can continue the momentum that Ocado needs to become a leader in logistics technology at the global level.”