Wednesday, 24 March 2010

Ocado Online Grocery Retailer – Profit is Sanity, Turnover Vanity?

Ocado, the up market online grocery retailer, has just announced a 25% increase in sales to £402 million but an operating loss of £14.4 million. Which is worrisome as this is now the tenth year in a row that the company has lost money, and indeed it has not made a halfpenny profit since it was set up by three Goldman Sachs bankers in 2000.

However, its enthusiasm is undiminished, it is confident it will move into profit sometime soon, and it plans to float on to the stock market after the general election, at a rumoured value of £1 billion pounds.

Might a few shares in Ocado be a good investment?

Certainly it does not lack financial muscle. In addition to the founding bankers, it has appointed to its board a former Reuters chief financial officer and a former vice chairman of KPMG. Before parting with cash though the investor might want to consider the following.

Ocado competes directly with Waitrose who have just set up their own on line service, but its products come directly from Waitrose in a tie up due to end in 2013. Even if the tie up continues its hard to see what Ocado can do to persuade shoppers to buy from them rather than Waitrose other than drop the price or up the service, both of which will be costly.

If the tie up does not continue, then the question arises of how Ocado with a turnover of £400m will have the same buying clout as Tesco, Sainsbury or ASDA who all run online services. It won’t of course.

Then we get to the way Ocado operates. Competitors fill orders in store then deliver locally. Ocado has a huge central warehouse to which all products are shipped, packed and then delivered around the country. It sounds very costly both on day to day running, and paying back the enormous amounts of money borrowed to set up the warehouse. And not very green.

Finally, the management team. It would be much more confidence building if Ocado’s banking founders had attracted onto their board someone battle scarred through hands on experience of running a real business either in food manufacturing or retailing rather then individuals connected with service businesses.

Its true that investment analysts are divided about Ocado with some saying that it takes time to build an online business, quoting Amazon which struggled for years to be profitable, and saying that online grocery shopping is a growth market with room for a competitor like Ocado.

A very long term investor could feel that its worth buying into as one of the major supermarkets might want to purchase Ocado themselves to give a premium arm to their activities.

The bottom line though is that after ten years there is no bottom line, just a further big loss.

It might be best to sit this one out.

Monday, 15 March 2010

British Lamb – Premium Price But Not a Premium Eating Experience

I’m still obsessed with the state of the lamb market.

The British are falling out of love with eating lamb, and sooner or later when the £ sterling gets stronger and exports fall off, it will have a knock on effect on producer lamb prices. In the last twelve months, according to figures published by the British Pig Executive (BPEX), people ate 8% less lamb than the year before, and whilst the pace of decline has slowed to a drop of 4% in the last twelve weeks, this contrasts with a growth of 4% for beef and 3% for pork. So whilst beef and pork are seeing consumers come back into the market there is no sign of the same for lamb.

So what is the problem?

Price is not helping of course. At £6.79 pence per kilo on average, lamb sells for about 80p a kilo more than beef and over £2 a kilo more than pork, and it would be easy to park it there and hope that somehow everything will come right again as consumers emerge from recessionary buying habits and start spending.

Apart from price, there is an issue of age. Lamb is bought primarily by the over 40’s, and Sam Pearl, chilled meat buyer from Tesco speaking to lamb producers in New Zealand, talked about the need to be innovative in the way lamb is presented to encourage younger buyers.

Certainly the supermarkets try to promote lamb. Sainsbury sells a range of lamb from different parts of the country. Tesco advertises in magazines. Booths, a small but very successful supermarket in the north and Sainsbury focus on breeds, Blackface in the case of Sainsbury and Herdwick in Booths.

Which leads us to the product itself and the biggest issue of all - lamb is a premium priced product but all too often it fails to deliver a premium eating experience. When shelling out £15 a kilo for chops or around £10 for a leg of lamb the product needs to be consistently superb otherwise people will be disappointed and refuse to buy again. Indeed, the BPEX data shows that less and less people are buying lamb.

Tracking down how best to improve lamb quality is not easy. Supermarkets send out mixed messages about lamb. Take seasonality. Except for a bit of Dorset lamb on their loose meat counter Waitrose holds fast to the principle of New Zealand in winter and UK sourced in summer. Tesco advertises that NZ is tenderest in spring, the south west and Wales in summer, and Northern England for Christmas, and Morrisons sticks to British all year round.

Then there’s age. EBLEX’s scientific work tells us that older, heavier lambs are tougher. Yet provided older carcasses are matured for at least 7 days, the lamb can be given the EBLEX quality mark. EBLEX also says that older ram lambs can develop off flavours. But over in NZ the Alliance farmers cooperative has done scientific work which concludes that this is not so.

Whilst there are some examples of growth in lamb sales, Tesco for example claiming that their sales have gone up by 12% because of promotions and encouraging new buyers, the main message is one of decline. So we must conclude that the issue with lamb goes deeper than an ageing consumer profile and a lack of excitement in its marketing.

One indisputable fact though is that consumers’ biggest complaint is about lamb is fattiness. Despite this, according to HCC, the Welsh meat executive, nearly 30% of lambs sold are fatter than R3L, and even after trimming by the processor, a lot of fat remains both around and within the meat. Could the time have come to tighten fat class standards further?

How irritated must consumers be, as I was, to buy two small chops for £5 yet find that nearly half is fat.

Whatever the answer, the total supply chain has to re-examine the issue of quality otherwise the market will move from niche to non existent.