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.
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