Analysis

Ocado’s warehouse fire: what’s the damage?

Ocado's warehouse fire

The immediate damage from Ocado’s warehouse fire in Andover has been dramatic, but the online grocer seems to be anticipating a long-term impact as well.

Staff have now been able to access the affected area as normal and pressurised materials have been removed from the site. However, Ocado’s share price has fallen more than 6% since the incident and the company is reporting “substantial damage” to the building and contents.

The site, which opened at the end of 2016 and offers direct access to the A303, had been providing around 10% of Ocado’s current capacity.

Ocado said it was impossible to determine which specific equipment had been damaged but it is aiming to increase capacity at other facilities. However, it had no current information on when the site will be back online and indicated there would be a “constraint” on its ability to meet growing customer demand.

Russ Mould, investment director at AJ Bell, says the fire came at a time when Ocado’s grocery business was facing questions anyway.

“The problem with Ocado’s £5.9 billion stock market valuation is that it leaves investors with very little downside protection if something – almost anything – goes wrong and that’s why the shares have fallen so quickly this week.”

He said that the grocery business “still does not really make any money”, citing the company’s declining profits and falling basket sizes in its full-year results.

Mould said the fire would “affect Ocado’s near-term ability to ramp up volumes and potentially affect the customer experience.”

John Perry, MD at logistics consultancy Scala, said Ocado’s main focus in the short term will be working with suppliers to overcome immediate shortages and redirect activities to other sites. However, he added that this would inevitably put “huge” strain on these sites.

The picture then is of a company that can’t easily equal its prior capacity. Ocado’s CEO Tim Steiner said back in December that 2018 revenue growth had come in large part due to increasing capacity – as Mould notes, the average basket size is falling.

As Mould argues, much of Ocado’s hefty stock price is due to its success in selling the Ocado Smart Platform rather than its performance in the grocery market. As the company noted in the Q4 results, building out this platform is capital-intensive so any impact on sales will have an impact on this business as well.

As Perry adds, as a further knock-on effect, the occurrence of the fire itself may “ring alarm bells” for other companies planning to invest in automation.

The company will have work to do to get back on its feet. However, it specifies that it does have insurance for the building and equipment as well as potential lost sales.

Image credit: Hampshire Fire and Rescue Service (Twitter)

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