As Amazon Fresh looms, Ocado emphasizes tech over food
01.09.2015 376 views
At Ocado Group Plc’s warehouse in Hatfield, a half-hour north of central London by train, hundreds of red shopping crates wind their way through a labyrinth of conveyor belts.
The plastic crates make a series of pit stops where workers fill them with any of 45,000 different products in the warehouse: corn flakes here, oysters there, bananas farther along. The crated groceries are then loaded into vans in time to make it to homes across Britain within a one-hour window.
The sophistication of the operation has many investors betting that the most important product for Ocado—the world’s biggest online grocery specialist—might not be food, but technology. With the stock trading at about 140 times estimated earnings, the stakes are high.
“If you believe Ocado is simply a U.K. grocer, the valuation is ridiculous,” said Charles Allen, an analyst at Bloomberg Intelligence. “But if you believe they have some technology to sell, then its outlook is much brighter.”
Ocado, No. 19 in the Internet Retailer 2015 Europe 500 Guide, has plowed hundreds of millions of pounds into its U.K. distribution centers, and this coupled with the thin margins in the grocery business means the company has reported just one annual profit in its 15-year history.
Chief Executive Officer Tim Steiner plans to boost returns by licensing Ocado’s technology to an international grocer—a prospect he has been talking up for two years. With speculation that Amazon.com is preparing a delivery station near London to offer its rival ‘Fresh’ service, the pressure is mounting.
Steiner, a former Goldman Sachs banker, says he wants to provide grocers with all of the computer technology and warehouse equipment they need to run an online service of any size. Ocado’s system offers “better operational efficiency than anything that’s been launched globally,” Steiner said on a conference call with analysts in June. He said the company is in advanced talks with multiple potential partners and aims to sign an international deal by December. Steiner declined to be interviewed for this article.
Andrew Gwynn, an analyst at UBS AG, cautioned that by targeting a deal this year, Ocado may have “backed itself into a corner.” The credibility of any partner is paramount, and Steiner shouldn’t rush into an agreement with a “lower or mid-league” grocer that wouldn’t provide the revenue boost needed to justify Ocado’s investment in technology, he said.
Ocado has ruled out partnering with any retailers that generate less than 10 billion pounds ($15.4 billion) in revenue, according to a person familiar with the matter. The decision was made due to concerns that an agreement with a smaller retailer could signal that the company was unable to attract a large grocer, said the person, who asked not to be identified because the negotiations are private.
Many of the largest potential partners already have online services, often supplied with goods directly from their own stores. Of the 24 grocers globally that generated at least 20 billion pounds ($31.6 billion) in sales last year, all but one sell food online, according to brokerage Redburn Ltd.
In the U.S., Ocado faces competition from both established players and new entrants. Royal Ahold NV’s Peapod, an online grocer with 25 years’ experience, has said it may consider licensing its technology.
Source: Internet Retailer
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