Ocado Group PLC (LSE:OCDO) shares slumped over 19% to 174p, around lows last seen over a decade ago, after US grocery client Kroger said it would shut down three of the warehouses that rely on the online grocery supplier's technology.
Kroger Co (NYSE:KR) announced that it will close three operating customer fulfilment centres, in Frederick, Maryland; Pleasant Prairie, Wisconsin; and Groveland, Florida by January.
Following a review of operations, the US mass-market grocer said Ocado's robot-operated customer fulfilment are more suitable to areas with a "higher density of demand", such as busier urban areas.
Ocado expects to receive compensation for the early closure of these three sites of more than $250 million, and to continue to work with Kroger on the operation of five US CFCs, in Atlanta, Boulder, Dallas, Detroit and Monroe, Ohio, "with constructive ongoing discussions around further use of Ocado's technology".
Kroger CEO Ron Sargent said an impairment of $2.6 billion will be made in the next set of quarterly results, with the board's new plans to pivot to a "hybrid ecommerce offering".
This will make use of its store footprint and "well-established third-party delivery providers" suchg as DoorDash, Instacart and Uber Eats, and some automated fulfillment facilities where applicable.
Analyst Clive Black at Shore Capital said it is a "devastating blow" for Ocado, which is being "marginalised as most of its CFC do not work economically in the USA or the mass-market first world in truth", which means Ocado's total addressable market "has been blitzed".
Kroger closing three sites is a "dreadful acclamation of what Morrison, Waitrose and others already knew: capital intensive, centralised fulfilment of food to a dispersed mass-market customer does not financially work".
"To be clear, Kroger states that the closure of the automated fulfilment network is because they did simply not meet financial expectations, which we see as a devastating blow to the credibility of the Ocado Group proposition."
Black says: "We are big fans of British entrepreneurs, British firms, and especially successful British innovators. Alas, that cannot be wholly said of Ocado where the vision and aspiration was wonderful, as was the idealism with no shortage of brain power and masses of technobabble. Kroger, however, is a smelling salt moment for the Group and we worry further about the real value of what is left in this firm."