What does the future hold for Ocado?

The middles class's favourite online supermarket is still struggling to land the big international partnerships it has been promising. Will Amazon's Whole Foods takeover change all that?

by Jack Torrance
Last Updated: 05 Jul 2017

Though Ocado’s shares haven’t performed especially well over the last couple of years it’s still a very valuable company, on paper at least. With a market cap of more than £1.8bn it’s currently trading with a price/earnings ratio of 150 – much higher than most bricks and mortar retailers. That’s because investors expect it to blossom into a larger and substantially more profitable business in the future. But how long will their patience last?

The move towards online grocery shopping has been slow in the UK, at least compared to other retail categories. While Ocado's latest topline numbers, released today, are looking good - including a 12.5% jump in revenues - it can only ever hope to hoover up a relatively small chunk of the market. 

So the plan is to grow the business by providing the ecommerce technology and logistics for other supermarkets, allowing them to offer a decent online service without having to invest millions in their own systems. 

To that end it has been burnishing its tech credentials, showing off futuristic automated warehouses full of impressive robots, capable of packing shopping bags and handling fragile groceries. Last week it demoed its first attempt at a self-driving delivery van on the streets of Greenwich as part of the Gateway autonomous transport project.

The problem is that so far Ocado has found few takers. In the UK it handles online orders for Morrison's (as well as selling some Waitrose products through its consumer site) but while it finally signed a deal with an unnamed European partner last month, promises of a big a tie-up with a notable global partner remains unfulfilled. (Also that European deal is just for Ocado’s online tech, not its shiny warehouse hardware – at least not for now).

It could be that the costs are just too high. ‘It's far harder to make online grocery pay when you pit hi-spec customer fulfilment centres and self-driving delivery vans against low-cost warehouses and low-paid humans,’ says John Ibbotson, director of the retail consultancy Retail Vision. ‘Arguably Ocado's greatest weakness has been to be too far ahead of the tech curve.’ 

Then there’s the big, bargain-basement elephant in the room – Amazon. The west coast tech giant, which will surely claim Wal-Mart’s crown as the world’s largest retailer before too long, is keen to grow its share of the grocery market. So far its attempts have been slow and patchy but last month is announced plans to acquire Whole Foods Market, a high-end food retailer with 400 stores, for $13.7bn.

On the face of it that should be bad news for Ocado – who wants to go up against one of the world’s biggest and most fiercely competitive businesses, especially one with as many bankrupted former rivals in its wake as Amazon?

But its CEO and co-founder Tim Steiner says it could be a great opportunity, because it will force traditional grocers to step up their own online efforts. ‘Grocery retailing is changing and we are ideally positioned to enable other retailers to achieve their online aspirations,’ he said today. Whether that means we’ll see that long-awaited big deal signed this month, this year or this decade remains to be seen.

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