Stores Beat Robots As Kroger Opts For $350 Million Ocado Pay Off

Maybe the robots aren’t coming for us after all, as grocery retailer Kroger confirmed its retreat from its once-ambitious partnership with fulfillment specialist Ocado.

The decision may have delivered a windfall to the U.K. automation specialist but underscores mounting pressures facing the largest traditional grocer in the U.S. as it rethinks how best to serve online customers.

Ocado will receive a one-time payment of $350 million from Kroger after the chain decided to shutter three of its automated customer fulfillment centers and curb plans for a broader nationwide rollout.

The payout, more generous than initially disclosed, draws a line under a strategy once slated to redefine Kroger’s e-commerce footprint but which has instead become an expensive detour.

Kroger disclosed the closures last month as part of a sweeping operational review that revealed its Ocado-powered warehouse network was consistently falling short of internal financial targets. The company said it would book a $2.6 billion impairment, related largely to its new online strategy and asset writedowns at the automated sites.

While the grocer emphasized it remains committed to digital growth, the adjustment amounts to an acknowledgment that a system designed to centralize order fulfillment in large, highly automated hubs has not scaled as intended. Instead, Kroger is pivoting back toward fulfilling a greater share of online orders from its extensive store estate, which covers more than 2,700 locations across 35 states.

Kroger And Ocado Sites Remain

Ocado said Friday that it will continue to operate five active fulfillment centers for Kroger, while a sixth facility in Phoenix is still scheduled to open next year. But a planned site in Charlotte, North Carolina, has been scrapped entirely.

The payment, which includes $250 million previously announced, will be made in January and is intended to settle obligations related to the canceled facilities and recalibrate the long-term economics of the partnership.

For its part, Ocado reaffirmed its target of turning cash-flow positive in its 2026 fiscal year, insisting it will pursue that goal through a combination of international growth and tighter cost controls. The news prompted a stock price spike for Ocado before it dropped away again, leaving its shares down over 40% on the year.

The shift marks a sharp reversal for a partnership that launched in 2018 with the ambition of building up to 20 automated hubs. At the time, Kroger described Ocado’s robotics and routing systems as an opportunity to leapfrog rivals in e-commerce.

Early tests appeared promising, but volumes have remained stubbornly below projections, particularly in regions where Kroger’s market share is thinner and where consumer adoption of delivery remains uneven. The economics of large, automated warehouses in the U.S. have struggled to compete with the speed and density advantages of store-based fulfillment, especially as customers have gravitated toward pickup services.

The strategic reversal comes as Kroger faces an increasingly complex landscape. The company is navigating a still-uncertain consumer environment marked by persistent inflation in key food categories, heightened price sensitivity and intensifying competition from Walmart, Costco and Amazon.

Kroger Earnings Under Pressure

Kroger’s most recent quarterly results showed modest total sales growth but shrinking operating margins, reflecting both promotional pressure and rising labor and logistics costs. The company ended its last fiscal year with roughly $19 billion of long-term debt and has been working to preserve cash ahead of its proposed merger with Albertsons, which remains under regulatory scrutiny.

Kroger’s decision to unwind a portion of the Ocado build-out allows it to redirect capital toward areas that offer more predictable returns, including store remodels, private-label expansion and digital loyalty initiatives.

For Ocado, Kroger represented the company’s most important international contract, both for scale and for proof-of-concept in the world’s largest grocery market. The recalibration inevitably raises questions about whether Ocado’s capital-intensive technology can justify its cost outside the densest urban areas.

Ocado’s leadership has maintained that the U.S. still represents meaningful growth potential and that the exclusivity arrangement with Kroger has not prevented it from continuing discussions with other retailers for future opportunities.

Yet the Kroger pullback adds to a string of setbacks. In the U.K., Morrisons said last year it would reduce its reliance on Ocado’s centralized warehouses and shift more online fulfillment back to its stores, using Ocado’s in-store picking software rather than the full automation suite. Other global partners, including Aeon in Japan, Casino in France, Coles in Australia and Sobeys in Canada, continue to build out Ocado-powered facilities, but none offers the scale or symbolic significance that a full U.S. rollout would have provided.

In the U.S., Ocado’s challenges have been amplified by a market that is fragmented, logistically complex and increasingly dominated by retailers with vertically integrated fulfillment networks. Amazon continues to invest heavily in same-day nodes that are tightly aligned with its Whole Foods and Amazon Fresh operations, despite ongoing issues in the grocery market.

Meantime, Walmart has leaned on its vast store base to create a hybrid fulfillment model that has proved both flexible and cost-effective.

Kroger Shoppers Opt For Pickup

For Kroger, the priority now is stabilizing its digital economics. While online grocery sales for the company have grown significantly over recent years, profitability remains elusive. The grocer believes that shifting more fulfillment back into stores will allow it to use existing labor and inventory more flexibly, reduce delivery distances and improve order cycle times.

The company has also been experimenting with smaller, regionally-dispersed delivery spokes designed to support store-based fulfillment without the cost of an Ocado hub.

And that means that for Ocado the challenge now is to show that its model can prevail even when Kroger, one of its most important partners has decided that scale, at least for now, is better achieved through stores that are closer to customers and cheaper to operate than a warehouse full of robots.