Ocado: is it more than dotcom hype?

Online supermarket Ocado has launched Britain's biggest flotation of the year. It announced that its shares would be priced between 200p and 275p when they begin trading in a fortnight. At the middle of this range, its market capitalisation would be almost £1.2bn. The founders, three former Goldman Sachs bankers, are in line for a windfall of £125m.

What the commentators said

Ocado's valuation "screams 'dotcom boom'", said Alexander Smith on Breakingviews. Sales growth has been strong, hitting 21% a year in 2007-2009. But the firm has never made a profit in its ten-year history, although its operating loss fell to £2.7m in the first half. And the initial public offering plan will further postpone its break-even point, as it will use part of the £200m raised to build a new warehouse. The hope is that this will pay off as more and more people shop online and that by around 2013 it could be profitable.

A key question here is whether Ocado's business model stacks up, noted Zoe Wood in The Guardian. It delivers food from a central warehouse, while its rivals pick food from their existing store network and then send it out. Analysts worry that the warehouse-based approach is comparatively inefficient and expensive. It's interesting to note, said Questor in The Daily Telegraph, that Sainsbury's once tried using a warehouse for online orders, "but it simply did not work".

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Another problem is that the web potential of the food market is being overestimated, according to Philip Dorgan of Ambrian. So far only 3.2% of the food market has moved online. The "economics online are tough and the low underlying profitability of food retailing makes this doubly so". Given all this, "the numbers don't add up"; £500m would be a more reasonable market cap. Ocado is a great company, said David Prosser in The Independent, but it will "really struggle" to live up to its extremely generous valuation.

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