Ocado hits gas to deal with Amazon threat

The online grocer takes a loss and issues new equity as it prepares a fresh expansion.

by Adam Gale
Last Updated: 06 Feb 2018

On the surface, Ocado just had a bad news day. The online grocer posted a £500,000 loss in 2017, down from a £12m profit the year before. It announced that profits would be hit this year as well it expands its delivery capability and, just for good measure, it’s asking for an additional 5% equity raise to pay for it.

Shares fell, unsurprisingly, 6.7%.  Yet Ocado CEO and co-founder Tim Steiner seemed positively upbeat at the investor presentation. ‘The opportunity is now - we mustn’t squander it,’ he declared. What’s going on?

The good news

Steiner’s optimism is not necessarily misplaced. Online grocery retail is growing rapidly as a category, which is reflected in Ocado’s 12.7% revenue rise to £1.4bn.

The company also has the opportunity to license its technology and expertise internationally in its solutions business, which could be especially lucrative once it gets off the ground, as marginal costs are low.

The company has already signed two international agreements, with France’s Groupe Casino and Canada’s Sobeys, to add to its Morrisons contract in the UK, which itself pushed the division’s revenues up 16.2% last year.

The annual loss has to be seen in this context: Ocado has taken a hit in order to accelerate its expansion plans, with hefty investments being made in robotics and AI (tech costs rose 25% last year to £42.8m) and in new customer fulfilment centres (CFCs - it opened its third, in Andover, late last year and its fourth will open in Erith this summer).

The bad news

Other than the red ink, the 38% increase in net debt to £228m and the disappointment of what amounts to a 2018 profit warning?

Ocado’s real problem is that it isn’t the only company that could exploit or catalyse the rise of online grocery shopping. The whole sector is waiting with bated breath for Amazon to enter the market in a big way.

The worry for Ocado is that its efforts constitute too little, too late. If it’s going to give Amazon a run for its money, it will need more than 13% growth.

So were the results good or bad?

As Confucius never said, sometimes the only difference between good news and bad news is perspective. Ocado does have an opportunity or, depending on how you look at it, a threat - and its difficulties came as a result of attempting to exploit that. But those difficulties are proving more costly than expected, and no one likes surprises.

Image credit: Eddie/Flickr

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