Get all your news in one place.
100’s of premium titles.
One app.
Start reading
The Guardian - UK
The Guardian - UK
Business
Sarah Butler

Ocado faces FTSE 100 relegation after failing to deliver on pandemic promise

An Ocado van with its side displaying a photo of berries
The company made losses of £394m last year and is embroiled in a row with joint venture partner Marks & Spencer. Photograph: Matthew Childs/Reuters

When Ocado entered the FTSE 100 six years ago, it was seen as a flag-bearer for changing consumer tastes, as traditional retailer Marks & Spencer narrowly avoided relegation from the top tier on the same day.

This week, those roles look set to be reversed, with M&S riding high and Ocado now expected to drop out of the index of the UK’s top companies in the quarterly reshuffle, after its valuation plunged to about £3bn from a high of £22bn during the pandemic.

What’s more, its joint venture partner M&S is part of the reason for the weakness in its share price. The pair are wrangling over a final payment for their UK-based grocery delivery tie-up, Ocado Retail, which was hoped to be worth more than £190m. M&S says it should pay nothing because performance has been so poor. Ocado’s feisty boss, Tim Steiner, has threatened legal action in response.

The final call on Ocado’s FTSE position will be made using market data on 4 June, but based on Friday’s figures its share price would have to take a last-minute leap to avoid relegation.

That seems unlikely amid uncertain sentiment that has led to a drop of about 50% so far this year, to 373p.

Ocado is described by Dan Coatsworth at stockbroker AJ Bell as “one of the most Marmite names on the UK stock market”.

When high streets were shut down as way to control Covid, Ocado enjoyed a boost from the shift to home deliveries – and convinced many that the change would be permanent. In the immediate aftermath of the pandemic, it emerged that people had quite missed visiting a shop for their groceries, with the UK’s online orders shifting back to about 11% of the market, from a peak of 14% in 2021.

Specialists in ultra-fast grocery delivery which enjoyed a private-equity-backed boom during lockdown, such as Getir and Gorillas, have rapidly folded in the UK, leaving the field largely to takeaway meal specialists such as Deliveroo and Just Eat – none of which appear to be making much profit. The trajectory of such groups does not fuel confidence in the future for Ocado’s own fast-track service, Zoom, one of its hoped-for growth areas.

Ocado made a pre-tax loss of £394m for the year to 3 December 2023; the previous year’s loss had been £500m. In April, a fifth of shareholders lodged a protest vote against the group’s plans for a £14.8m pay package for Steiner.

Meanwhile, Ocado’s focus on robot-led warehouse technology has proved to be rather inflexible, such that the company was unable to fully capitalise on booming demand during the pandemic, or row back later without major financial pain.

Big supermarkets such as Tesco, Sainsbury’s and Waitrose have shut down at least some of their home-delivery warehouses, focusing instead on more cost-effective and flexible deliveries from stores.

On the plus side, this year Ocado’s retail venture with M&S has stepped up sales growth.

However, M&S boss Stuart Machin has recently pointed out that Ocado’s much-trumpeted Smart Platform technology upgrades – such as new software and robot picking arms to make deliveries more efficient – had been “much delayed”, possibly further cooling hopes for the group’s efforts to sell its technology around the world.

During the pandemic, Ocado’s share price also took off as investors saw it as the UK’s answer to Silicon Valley technology firms rather than simply an online grocer. It has undoubtedly won some major customers for its gadgetry, including Kroger in the US, Groupe Casino in France, Lotte in South Korea and Aeon in Japan, but investors had hoped for more.

Critics, such as Shore Capital’s Clive Black, note the millions spent on research and development in return for quite modest sales, while delays to key projects, such as a delivery centre for Coles in Australia, have hit confidence.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says: “Deals are not being signed as fast as investors were hoping for its future growth engine, Solutions. It charges third-party retailers to use Ocado’s robotic systems. There’s still big potential here, but timeframes of growth look more questionable and that’s knocked the valuation.”

Ocado’s expected exit from the FTSE 100 has only fuelled speculation that Ocado will look to list in the US instead of the UK. Steiner may encounter fewer complaints about multimillion-pound pay deals across the Atlantic but whether that will help find new fans of the group’s robots remains in doubt.

Sign up to read this article
Read news from 100’s of titles, curated specifically for you.
Already a member? Sign in here
Related Stories
Top stories on inkl right now
One subscription that gives you access to news from hundreds of sites
Already a member? Sign in here
Our Picks
Fourteen days free
Download the app
One app. One membership.
100+ trusted global sources.