Ocado borrowed its way to success. Now its debt addiction risks disaster

illustration: Ocado van ruined

Tim Steiner likes to say he has had two jobs. First, he was a bond trader at Goldman Sachs. Seven years later – when it “felt like a time to do something other than that” – he set up Ocado Group and became its chief executive. He has not moved roles since.

The two careers may seem miles apart. But for Steiner, there have been some constants. One of them is a preoccupation with debt.

Concerns over Ocado’s debt pile are rapidly coming to the fore as the technology group becomes the latest to be burned by spiralling interest rates.

A recent move to remortgage some of its debts has left it with higher borrowing rates than before, with Ocado’s debt interest bill rocketing from an estimated £27.3m a year ago to almost £100m this year.

The surge has thrown into sharp focus the ongoing struggle at Ocado, as it battles to shed its image as a business fuelled by debt to one that funds its own growth. Will Steiner and the company’s addiction to debt be their undoing?

Unlike most chief executives, Steiner did not inherit his position but used his Goldman trading know-how to establish Ocado from the ground up, growing it a valuation shy of £2bn.

The company, which supplies robot warehouse technology, has established tie-ups with a swathe of businesses including US retail giant Kroger and Britain’s Morrisons. It has a long-standing deal with Marks & Spencer to jointly own online grocer Ocado Retail, which is best known for its purple and green vans seen on Britain’s street.

Tim Steiner is the founder and chief executive of Ocado Group, which supplies robot warehouse technology - Chris J. Ratcliffe/Bloomberg

Yet Ocado has used the debt markets to propel that growth more than most, leaving it vulnerable to an interest rates environment which has been less than favourable recently.

In May, Ocado revealed that it was selling £300m of debt – so-called “senior unsecured notes” repayable in 2030 – at a coupon of 11pc.

It would use the funds to buy back bonds with yields of around 0.88pc and 3.88pc that were due this year and next – borrowing new money to pay off its old debt.

The decision was taken “to extend the maturity profile of Ocado’s debt”, the company said. Still, it has meant Ocado’s debt interest bill has soared.

One insider said: “The thing is, what could Ocado do? It needed to refinance – but obviously debt is much more expensive now than it was a few years ago.”

In its first 24 years, the company raised more than £4.5bn of equity and debt. At the end of December, its net debt stood at £1.2bn versus its equity value of around £1.9bn – a debt-to-equity ratio which can sometimes raise eyebrows.

Since then, it has refinanced some of its bonds, but also drawn down on a $152m (£110m) letter of credit linked to its tie-up with US giant Kroger.

Story Continues

Brittain Ladd, a consultant who advised Kroger on its deal with Ocado, says the company is known for its “high-debt load compared with its market capitalisation”.

Within Ocado, there have been steps to reverse this. Recently, bosses have stepped up efforts to finally turn the company cash-generative. Spiralling interest rates have only made it more important that Ocado stop relying on debt.

“If it could just get to cash-flow positivity, then life looks so much easier,” says one insider.

For now, Ocado remains firmly in the red, recording a pre-tax loss of £375m in 2024 on revenues of £1.2bn. This compares with a £394m loss on revenues of £1.1bn a year earlier.

In an attempt to turn profitable, Ocado made almost 1,000 job cuts last year. In February, it said it would have to axe more positions to try to make the business profitable, with roles in its research and development department to go.

Steiner said it was “not a fun position to be in but we are coming to the end of the cycle [of cuts]”.

However, Ocado chiefs have claimed this will help them to become cash-flow positive by next year.

Some in the City remain wary after years where Ocado has pushed back cash-flow targets.

Fitch Ratings, the credit rating agency, gave Ocado’s new £300m debt raise a rating of B-, only slightly better than the triple C bracket, which is deemed highly risky.

It said this was because Ocado’s “execution risk on reaching scale and profitability remains high due to the slow deployment of the company’s infrastructure by its partners, while its liquidity position is being eroded by high capex”.

Clive Black, of Shore Capital Markets, says Ocado’s problems have been long-running.

“From day one, this has been a business that has had to expend capital in order to generate sales.” As interest rates have risen, he says “the financial corridors have been closing in on Ocado’s options, so they’ve had to materially reduce their capital investment”.

However, even last year, Ocado was still spending £392m on capital expenditure, compared with £520m in 2024. Ocado insists it has strong liquidity, with £772m of cash and cash equivalents at the end of the year.

However, Black says he believes “there is a reasonable prospect that Ocado will have to come back to the market and raise more equity”.

There are potential ways Ocado can avoid this. The opportunity in the US – where it is partnered with grocery giant Kroger – is significant.

“The US is a trillion-dollar grocery market, “ says one insider. “Kroger is 20pc of that so it’s absolutely huge.”

If the US retailer were to move to take scores more robot warehouses – from eight currently – it would be “completely transformational” for Ocado, they say.

Ladd says others are waiting to see what Kroger will do, after years of concerns over the appetite for its warehouses. Ocado slowed its rollout of warehouses in the UK in 2022 amid weaker demand.

“The biggest challenge for Ocado is that they haven’t been able to stabilise the relationship with Kroger,” he says. “Ocado must get Kroger to announce they view Ocado as a long-term solution and partner. The failure to do this is why Ocado isn’t signing other retailers.”

City sources say it will be a major focus at Ocado’s interim results in July, with bosses under pressure to get Kroger to sign up for more robot warehouses.

Last December, The Telegraph revealed Ocado was parachuting staff into the existing US warehouses to help Kroger get the best out of its technology.

In the meantime, all Ocado can do is cross its fingers – and cut its own costs. Its rising debt interest bill will be far from helpful.

Steiner, though, has always maintained he is up for a challenge. It is something that has been engrained in him from the start of the career. “I’m a problem-solver,” he said in 2022. It was something he learnt at Goldman Sachs.

“Anyone running a business is a problem-solver, right?” Everything hinges on how he solves this one.

Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.