Was I wrong about Ocado?

Ocado: where is the money?

When I first wrote about Ocado (OCDO) back in the summer of 2010, I didn’t mince my words: “Ocado IPO: don’t touch it with a bargepole

I checked in again at the end of 2012 – “Ocado was a terrible mistake”. Clearly, I still wasn’t impressed.

By mid-2013, it looked like the market was coming around to my way of thinking. Back then, Ocado was one of the most shorted companies in the FTSE all-share.

But a lot can happen in six months! Since then, Ocado has signed a new deal with Morrisons, the cynics and short-sellers have been burned, and now the share is at all-time highs. It’s jumped about seven-fold in the last year and a bit. It’s now 14 years old, worth £3bn – and yet to make a profit.

So, I have to ask – was I wrong about Ocado?

Groceries are bloody hard work

Like many others, I just couldn’t get my head round Ocado when it floated. I thought the price investors were asked to pay was too much, and that the company’s business model was flawed.

Yes, I could see a great ‘story’ there – the ex-Goldman bankers that put together the business knew exactly how to sell the thing to investors. They talked of hyper-efficient customer fulfilment centres and all the wonderful technology they were throwing at the business.

But this was, and is, a business overly reliant on just one contract (Waitrose), in a fiercely-competitive market with terrible margins. Back then Ocado hadn’t made a profit. Get this – it still hasn’t.

I mean, the online part of grocery sales is the absolute worst aspect of the business. For decades, supermarkets grew fat on customers doing all the work. An online delivery service puts the onus right back on the retailer and forces them to do the dull and back-breaking side of things again.

And the point is, Ocado targets precisely this terrible part of the grocery business.

That is why I didn’t want any part of it.

It’s been 14 years where is the money?

In contrast, Ocado has almost doubled revenues, from about £400m to £792m.

Not bad, you might say. Certainly nothing to complain about. Well, I’m not so sure. Bear in mind that at the flotation, Ocado’s broker was predicting revenues of over £1bn, and profits – well, let’s just say that by now they were expecting £32m. The fact is that after 14 years in business, these guys are yet to make a penny.

In fact, Ocado has only been surviving on constant cash injections. First from wealthy backers and its key trading partner, Waitrose; then by bank loans and retail investors. And more recently they’ve tapped its newest trade partner, Wm Morrison, for over £100m.

But of course, the ex-banker boys in charge are still enthusiastic. They’ve cleverly installed Sir Stuart Rose, the ex-Marks and Sparks CEO, as chairman, and they keep beating the Ocado drum.

CEO Tim Steiner enthuses: “We are not close to announcing a deal, but we are investing for multiple deals… We are not trying to be a £1bn or £2bn retailer. We are trying to be a business that supports tens of billions of sales.”

Hmmm… tens of billions of sales. Sounds great! But, first, how about some profits?

What are we missing?

Steiner says the internet is “unstoppable”. Retail analyst Nick Bubb isn’t convinced: “Given the ‘unstoppable’ momentum in online grocery shopping, it is a bit disconcerting that Ocado isn’t growing faster and is still losing money, notwithstanding its hefty £3bn market cap, but perhaps we are missing something.”

You and me both!

Investors have been told year after year that the business is on the brink of great things, and so they continue to chase this bright, elusive butterfly.

Right now, Ocado investors are supposed to be getting excited about the deal to deliver Morrisons’ online offering. About brand new international buyers of the company’s fantastic technology.

Yeah, yeah –  I’ve heard it all before. The fact is that the Morrisons deal isn’t expected to produce profits until 2018. And exactly how much they can charge for this wonder technology is questionable. I mean, are these people IT consultants now?

And let’s not forget the fact that the established supermarkets are investing heavily in their own online offerings. So-called dark stores are cropping up across the land. Waitrose itself is no slouch. They’ve launched their own online offering and you’ve got to wonder whether they will at some point consider winding down their relationship with Ocado.

So what’s the verdict?

Jason Gissing, one of the co-founders of Ocado (that is, one of the clever bankers in the nice suits) has had enough. He’s leaving, and in so doing, he’s cashed in £15m of OCDO shares.

Good on him! But you probably won’t be surprised to hear that I’m maintaining my ‘sell’ rating on OCDO.

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  • andy green

    Well, yes you were wrong. As long as there are buyers for the shares and the price keeps going up, who cares what the fundamentals are? It is like dot com time all over again.

  • Frank

    Great article. It is as obvious as a pikestaff that Ocado is on its way to oblivion. Only, I am surprised it is taking so long. Why are investors such idiots?

  • Graham Mills

    I agree completely with Bengt, I never have seen how you make any money out of this type of operation. You will always be chasing new revenue with additional investment.
    Like the dot.com bubble the train will come off the tracks eventually and the share price will fall through the floor.
    I would love to have been a fly on the wall when the founders were originally thinking of the business.

  • http://rightside vince

    A great article but really unnecessary to make a gratuitous comment about clever bankers in nice suits.

  • revkevblue

    Not once have you mentioned customer satisfaction, I have been using their online shopping and delivery service for a number of years. It is user friendly, efficient, painless, and it is delivered on time by helpful, courteous drivers. the goods are of a good standard, and I have only had a problem once with an item, and that was dealt with quickly and to my utter satisfaction. There are not many companies that give that level of service in this profit driven age, they deserve to flourish and I hope they continue to do so. it is strange that it is run by Bankers, bit of an oxymoron that.

  • Anonymous

    When I think of Ocado I think of the two Ronnies sketch, the customer in the hardware store asking for one thing and Ronnie Corbett picking the wrong item every time. Ocado is great for customers but until they start charging at least what it costs to pick the goods and delivery then I dont see how its ever going to make a profit. Problem is if they ever do start charging on a cost plus basis they will instantly lose all their customers, some of these bankers probably think the jobs mainly done by robots but thats nowhere near the reality of the cost of a 3.5 ton truck making a 12 mile round trip to deliver a pound of bananas.

  • cris

    It wouldn’t surprise me, I’ve only followed 2 recommendations from Bengt…..don’t buy Ocado and do buy Co-operative Bank 5.5555% Perpetual Subordinated Bonds…..’nuff said

  • Peter

    Just because the shares go up, hardly a reasoned argument for buying. Sooner rather than later, the air will go out of the balloon

  • DLF75

    Bought in at 220p because I love the service and company and fully believe that in 10 years NOBODY will be going to a supermarket.

    Watched them crash to 75p, thought sod it, might as well see what happens. Took some profit at 330p. Enjoying them being at an all time high.

    Agree it will be interesting to see if they can ever make a profit, but the service is second to none, really leaps and bounds over the competition.

    I see more upside as they announce futher tech deals, even if it is “bubblelicious”

  • Roger R.

    Stuart Rose, think Marks & Spencer he was hardly a success there.

    ‘nuf said.

  • PGD

    Of course other supermarkets are investing in on-line delivery systems because they can see their market share shrinking. The main difference between them and Ocado is that we dont have big stores to fall back on, thats why we care so much. We are good at what we do and will get even better

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