Ocado Group PLC (LSE:OCDO), to put it simply, is two businesses rolled into one, which has sparked debate on where its focus should lie.
There is Ocado Solutions, which looks to partner with retailers seeking to streamline their own delivery services by using the FTSE 100 company’s technology.
Then there is Ocado Retail, the joint venture with M&S, an online grocer selling and delivering Ocado and M&S products.
Much of the noise around Ocado is about whether it should ditch its retail arm and focus entirely on its solutions business, on which it has pinned its future hopes for growth and profitability.
Ocado Solutions so far has partnered with 12 global retailers, including Kroger in the US, Morrisons in the UK and Coles in Australia, operating in 23 sites in total.
One of the systems it offers is the Ocado Smart Platform, which is an end-to-end eCommerce, fulfilment and logistics platform, according to Ocado’s website.
Today, strong growth revenue growth in its Solutions arm helped offset a 3.8% decline in sales in its retail arm.
Indeed, progress was evident to see in this part of the business.
UK solutions revenue grew by 13% to £802mln while the international unit saw revenues more than double to £148mln, albeit the latter is still operating at a loss of over £100mln.
However, despite Ocado’s upbeat tone on Solutions, there is a feeling among investors that growth isn’t happening fast enough after the group posted a total £500mln loss in the year ended 31 December.
“The promises of large-scale adoption for its cutting-edge technology has yet to fully materialise, after some considerable time, which has led to investors shunning the stock in their droves,” said Richard Hunter, head of markets at interactive investor.
This may well point to why it makes sense to hold onto its retail operations.
“Without its stake in Ocado Retail there would be very little left in Ocado Group at the moment,” said Clive Black, retail analyst at Shore Capital.
Ocado Retail accounts for around 87% of the group’s total income, a large chunk of revenue to give up while the Solutions business is yet to really take off.
There is also an argument that its retail arm is core to gaining licensing deals for its solutions.
If the group cannot demonstrate and prove the success of its solutions, at least in an operational sense, it might find it difficult to sell the idea to anyone else.
However, there are genuine concerns about the outlook for online, high-end grocery delivery services with the normalisation of shopping habits and cost-of-living crisis going against the group.
“The future of online grocery retail is unclear, and seeds of doubt have been sown as to whether the market will grow in the fashion expected after its popularity during the pandemic,” said Joe Dawson, retail analyst at GlobalData.
Of course, any potential sale is predicated on M&S, its joint venture partner, wanting to buy Ocado out of the agreement.
So far, M&S has paid just under £570mln out of a total £750mln agreed as part of the deal, with the rest to be paid should certain performance criteria be met.
However, retail commentator Nick Bubb suggests that M&S’ appetite to do so may not be as strong as when they partnered together back in 2019.
“At the time it looked like a shrewd deal by M&S, but they probably feel now that they over-paid,” said Bubb.
For now, the performance and outlook of Ocado’s retail arm, at least according to Black, is the least of its worries.
Instead, it needs to focus on showing greater evidence that its investments and innovations can produce an economic return.