Connect with us

Can ailing online supermarket Ocado deliver the goods?


Can ailing online supermarket Ocado deliver the goods?

Ocado, the tech-focused online supermarket, divides opinion. It is the Marmite of enterprises: investors either love it, trusting in its potential to produce handsome rewards, or hate it precisely because of this ‘jam tomorrow’ promise.

Shares in the company – founded 22 years ago and named after avocado, minus the first two letters – have slumped. 

At the height of the pandemic home delivery boom in September 2020, the shares reached 2800p apiece. They are now 70 per cent lower, at 810.8p. 

Ocado shares have slumped by 52% this year, more than all other biggest UK grocers

Does this represent a reality check? Or a mere setback on the way to fulfilment of the prediction in 2020 that the price could reach £100 by 2030? 

After all, as Hargreaves Lansdown puts it: ‘Ocado is the only global provider of an end-to-end online grocery platform’ – interesting for those eager to back British innovation. 

Darius McDermott of FundCalibre says shares may have become overvalued in the Covid era, but the deployment of AI and robotics makes Ocado different: ‘It is so much more than a grocer.’ 

Reflecting this status, Ocado’s £5.8billion market capitalisation exceeds that of Sainsbury’s which is £5.4billion. But critics say that, unlike Sainsbury’s, Ocado has only made a profit three times in its history and may struggle to do so in future. 

Huge expenditure is required for the development of the robot grocery-picking technology used by Ocado, but also sold to other supermarkets, like Kroger, a US chain, the Spanish Alcampo and Casino, based in France. Some question, however, just how lucrative these deals are. 

Meanwhile the growth of revenue from Ocado Retail is slowing, thanks to higher energy bills, the cost of living and the cooling of the love affair with online shopping. This joint venture with Marks & Spencer is the business behind the delivery vans that you see on the streets. 

The delivery of groceries is also becoming more competitive. Sainsbury’s and Tesco have successfully expanded this part of their operations. 

These and other supermarkets are partnering with apps like Getir, Gorillas and Zapp that provide the swift delivery of avocados and other necessities. 

Ocado has been forced to rebrand its own app Zoom as Zoom by Ocado. It was felt that the ‘Z’ in the original logo resembled the ‘Z’ that has become Russia’s insignia in the Ukraine war. 

Another bone of contention is the remuneration of Tim Steiner, Ocado chief since 2000. Under an incentive scheme, he could net £100million over five years. Royal London Asset Management (RLAM) was among those who voted against the plan this month. 

The Ocado faithful, relieved that it has won a crucial legal battle with the Norwegian robot group Autostore over patents, think Steiner deserves such rewards. 

They point to the bounty that could emerge over that period if it triumphs in the robot wars. 

Its Series 600 robot, produced by 3-D printing, is forecast to cut labour costs by a third. Brokers Bernstein have said such advances could turn Ocado’s warehouses, or CFCs (customer fulfilment centres) into ‘cash machines’. 

Huge expenditure is required for the development of the robot grocery-picking technology used by Ocado

Huge expenditure is required for the development of the robot grocery-picking technology used by Ocado

Indeed, the company expects that EBITDA from the CFCs should rise 50 per cent. Ocado defines EBITDA as earnings before net finance cost, taxation, depreciation, amortisation, impairment and exceptional items. 

You may never have subscribed to the near-messianic belief that surrounds Ocado. But you have a stake in it if you save in RLAM funds, or in Baillie Gifford’s Edinburgh Worldwide and Global Discovery trusts. If you have owned shares for a decade, you have seen a 570 per cent rise in their value, which may incline you to tolerate the current woe in hope of recovery.

HSBC has upgraded the shares from ‘sell’ to ‘hold’, although it has cut its target price from 1100p to 1000p. Credit Suisse also lowered its target price from 1650p to 1600p but this broker expects Ocado to outperform.

David Coombs of Rathbone warns that the lofty prices of the Covid era may not be reached again for the next five years. 

He adds: ‘I’ve always wanted to buy Ocado. But I have never been able to bring myself to do so because, although it has a great, great story, it has not delivered on it. During the pandemic, it did not fully take advantage by making the most of the customer base.’ 

At that time, as a long-standing customer, I could not obtain a delivery slot. The wider doubt triggered by this irritation made me decide not to buy the shares. 

The desire to seize a bargain can be hard to resist when prices have tumbled. Yet it can be wisest to consider shares whose prices have dipped, not plummeted. 

Take that other company named after a fruit – Apple. Its shares are down 19 per cent this year. There will be more pain ahead but also more profits, which matter now more than ever.

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

More in Business

To Top