Business
| On-demand grocery delivery has been a business model struggling to gain traction since the first dot-com boom. Now the UK's Ocado is looking to expand international operations, despite heavy competition from the likes of Amazon and others. |
Investors, it seems, have a complicated relationship with Ocado, the world’s largest dedicated online grocery supermarket based in the United Kingdom.
After its IPO back in 2010, the company spent two and a half years dwindling in value. By the beginning of 2013, it had shed around 50% off of its share price as the markets feared it may never turn a profit.
What happened over the next 14 months was nothing short of spectacular. The company rocketed up the stock markets, increasing 600% in value to around £600 per share. The company still hadn’t turned a profit.
It shouldn’t have been too much of a surprise, then, when Ocado’s value headed straight back down again over the next nine months, towards the £210 level. A recovery of sorts followed, and Ocado went into February worth around £415 per share (giving them a market cap of £2.5 billion).
On February 3, Ocado released its earnings to the markets. For the first time in its history, the company delivered a yearly profit. That amounted to a pre-tax profit of £7.2 million, up from a loss of over £12 million in the previous year. Revenues were close to the £1 billion mark. Shares increased 5% off of the back of the announcement.
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For a company with a history as volatile as Ocado’s, a 5% move seems a little subdued, and in truth there are a few reasons why the markets didn’t overreact to the announcement. Ocado’s profit did not come entirely as a surprise, with quarterly earnings results pointing to a healthy year. Ocado’s business strategy also means that hitting profit for the first time might not necessarily mean a run of wealth for investors. Rather, Ocado’s owners tend to reinvest any spare cash on aggressive expansion.
CEO Tim Steiner has already mooted a deal that could see his company expand internationally. He was unwilling to divulge any information on what companies Ocado is in discussion with, but did say that he was targeting a deal in 2015.
There are also several possible problems on Ocado’s horizon. Most of the company’s business has been made delivering for Waitrose, in a deal that could be set to end– thanks to a break deal in the contract. Mr. Steiner has refused to speculate on what could happen to his company’s deal with Waitrose, though he has stated that it is Ocado’s interest for it to continue.
The company also has a relationship with Morrisons, to run the flagging supermarket’s much-needed online shopping business. The usefulness of such a relationship may be limited, however, with Morrisons looking set for yet more trouble in the ongoing supermarket price war. As competition in the supermarket sector ratchets up, Morrisons looks in trouble.
Then there is the potential rivalry with a much bigger player, one much closer to Ocado’s business model. Amazon has been using its expertise in online delivery to grow a grocery store over in the US, under the brand AmazonFresh. Only available in a few cities at the moment, the business is widely expected to grow in the coming months: not just in the US, but internationally.
Mr. Steiner was recently asked about the threat of AmazonFresh, with the CEO responding that more competition didn’t concern him. His business already competed with big players in the UK supermarket sector. But Amazon’s similarity to Ocado makes it a much greater threat. Like Ocado, it will invest greatly in winning customers, choosing not to focus on pleasing shareholders. Like Ocado, it can emphasize convenience and technological superiority and as such avoid the threat of discounters Lidl and Aldi. It also has the added boost that comes with a globally recognizable brand and considerable wealth.
Attempting to discern how Amazon might impact Ocado’s business would require feats of insight beyond most of us. What is clear is that the current stratification evident in the grocery industry may well prove to be hugely powerful for Ocado: and increased competition at all levels can only be a win for customers.
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| By Debbie Fletcher | Embed |
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