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Ocado fulfilment model comes under fire from investment firms


Two major investment firms have raised doubts about the relevance and viability of the Ocado fulfilment model.
The reports from J.P. Morgan and Jeffries both raised doubts about aspects of Ocado’s business model.

J.P. Morgan’s note said that while Ocado had won several deals with supermarket players worldwide, the company’s valuation of £9 billion was “stretched”.

It valued Ocado’s share of the retail joint venture with M&S at £872 million. Meanwhile, the solutions part of the business through which Ocado sells its customer fulfilment centres (CFCs) to other retailers was valued at £3 billion based on J.P. Morgan’s revenue projections.

Collectively, this only accounted for around 40% of the total value of Ocado’s current share price.

J.P. Morgan said the rest of the valuation was ascribed to potential new signings in the form of either additional clients or more distribution centres with existing clients, but that the valuation would require at least 126 CFCs to be contracted based on a net present value of £44 million per customer fulfilment centre.

“This may happen but at this point we do not see risk/reward as compelling and scope for outperformance appears limited,” the note said, lowering its price target and designating the stock “underweight”.

Ocado’s US customer Kroger also received a downgrade, from buy to hold, in an unrelated report sent to investors earlier this week by investment firm Jefferies.

Jefferies said Kroger had made a “poor and significant long-term capital allocation” misstep in adopting the Ocado model of customer fulfilment centres.

It argued that micro-fulfilment (MFC), in which smaller fulfilment centres are situated closer to the customers, offered a better return on investment than the centralised fulfilment model favoured by the Kroger-Ocado partnership. It said the former model was less capital-intensive and more easily scaled.

It said Ocado’s centralised model worked well in the UK but it would be less suitable for the US due to lower population density and less favourable income demographics for Kroger markets.

Jefferies argued that Walmart, which already uses the MFC model, was better placed to take advantage of the situation in the country.

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