The decision by Morrison Supermarkets to reduce its use of Ocado Group PLC's (LSE:OCDO) robot-run warehouses is another example of grocery chains around the world scaling back expansion plans with the online delivery specialist, according to analysts at AJ Bell.
“The ground beneath Ocado’s feet continues to crumble," they said, following decisions by several clients in the US and Canada.
Morrisons currently shares two 'customer fulfilment centres' (CFCs) with Marks & Spencer/Ocado joint venture, but it now plans to only use one of the sites, Dordon.
Analysts at Peel Hunt said Morissons is not just dropping the Erith CFC but also looking to expand its in-store picking network for online deliveries, which also uses Ocado's fulfilment solution.
They said they expected the continued robust growth of the Ocado Retail joint venture "provides more capacity to meet this growing demand without the need for more capex".
But the AJ Bell analysts said Morrisons relying more on in-store fulfilment is "as big of a red flag as you can get for Ocado’s business model".
While Ocado’s believes its big warehouses are far more efficient than sending grocery workers to fill a basket down supermarket aisles, the AJ Bell team said many supermarkets seem to be arguing otherwise, particularly as so many people still prefer to do their weekly shop in person.
"The goods are already on the shelves in the supermarket and it doesn’t take long to fill a basket. It’s expensive to run a warehouse, get the goods in the van and deliver them to someone’s house," the analysts said.
"While the customer pays a delivery fee, that money is soon gobbled up by the associated costs. One has to consider whether the fee is enough to cover wages, fuel, vehicles and so on. Fundamentally, supermarkets would probably prefer their customers to visit their stores."