On the face of it, this morning’s trading update from Ocado looks like good news. The online supermarket’s group sales were up by 15% in the 16 weeks to November 29, its thirteenth consecutive quarter of double-digit growth.
Compared to its bricks and mortar competitors (particularly Tesco, Sainsbury’s, Asda and Morrisons), Ocado is holding up very well, and its CEO and co-founder Tim Steiner said he expects sales to continue growing ahead of the wider online grocery market.
It seems investors don’t share his upbeat outlook, though. Ocado’s share price slipped 6% this morning to 335.7p, well down from the 470.8p annual peak it hit back in July. With a market cap of around £2bn (more than 50% that of Morrisons, which had 16 times more revenues in 2014) and a price/earnings ratio of around 300, there’s little wonder investors have high expectations.
Those expectations were stoked even further back in February when Steiner said he was confident of signing a partnership with a large international retailer by the end of 2015. Though its core retail business has continued to grow, the retailer has come to the realisation that it needs to work with established supermarket chains if it wants to be a global success.
That ‘pivot’ started as a partnership with Morrisons last year. The old supermarket has been slow to move to online, so getting Ocado to do all the dirty work made a lot of sense. Ocado hopes to do the same for other supermarkets, effectively becoming a white-label technology and logistics business.
In a bid to remain at the cutting edge, the supermarket has been investing in new tech including artificial intelligence that can predict when people want to buy what, and humanoid robots that could be used to maintain warehouses and pack products.
So far the killer international deal has proven elusive though. Given that today’s statement makes no mention of any deal, and there’s just two weeks left until Christmas, the prospect of an announcement in 2015 seems unlikely.
Whether news of a tie-up comes in the next two weeks or two months is pretty immaterial, but Steiner had better get his skates on. Amazon’s apparent impending entry into the UK grocery market could seriously threaten Ocado's growth prospects. Inking a deal with Wal-Mart or Carrefour could be the key to its long-term success.
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