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Don't be tempted to pick up shares in Ocado
Grocery delivery service Ocado is offering customers the chance to take part in this summer's potential flotation of the company. Don't, says Merryn Somerset Webb. Here's why.
Back in March, when online grocer Ocado first said it was planning a £1bn float, I said I found the whole thing entirely bemusing and rather suspected that after firm words from a few of the banks, Ocado would quietly drop the whole idea.
It has not. Instead the company has hired almost every bank in the UK (not a bad move given that banks involved in IPOs rarely say nasty things about the firm paying their fees), alongside a smart PR agency, and is offering the chance to buy shares to staff and to any customer who spends, or has spent, £300 or more with the firm since the start of this year (assuming the float goes ahead).
That's unlikely to exclude anyone who has ever used Ocado (getting one of its smart vans to pull up outside your house might impress the neighbours, but it doesn't come cheap). But presumably a large number of Ocado shoppers have some degree of financial savvy or they wouldn't be able to afford to shop there in the first place so why on earth would they take up this far-from-tempting offer?
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Ocado has now been around for ten years. It has devoured millions and millions of pounds in capital. And it has raised its revenues to a reasonably impressive £427m thanks to the excellent service it offers to London's well-off middle classes.
But it has never made a pre-tax profit. Never. Not once in ten years. And it is really hard to see how that might change. Grocery delivery is a competitive business and while Ocado is good, it isn't that much better than the others: I changed from Ocado to Sainbury's when we moved last year and I can honestly say that the only difference I have noticed so far is in the price.
It is also fair to say that the start of a decade of probable deflation may not be the best time to aim to expand a swanky home delivery service. So what happens when shares in Ocado float and fall not an unlikely scenario given the state of the stock market? Will shareholder shoppers then desperately step up their spending in an attempt to shore up the business? Or will they switch to Sainsbury's in an attempt to make back their money via the cheaper prices of the Basics range?
There are benefits for Ocado in this float (one presumably being that its founders will get their hands on some money even without the fuss of making the business actually make any) but there are dangers too one might be that as fast as they gain shareholders, they lose customers.
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