Here’s an interesting observation from investment house Hargreaves Lansdown - Ocado, the UK online grocery tech firm, now has an equity value greater than that of Marks & Spencer. Of course, it’s also yet to turn a profit, but the firm’s latest numbers are strong in the increasingly competitive online grocery sector.
For the 13 week period to 2 September, revenue rose 11.5% to £348.6 million. That’s slightly down on the 11.7% growth for the first half of the year, but ahead of expectations. Other numbers of note - Ocado is processing 283,000 orders per week, up 11.4% year-on-year, with the average order size remaining stable at £106.
During this year, Ocado has opened two more of its proprietary robotic warehouses, at Erith in Kent and Andover in Hampshire. These are operating with increasingly fast levels of efficiency. According to Ocado, Erith is now processing more than 20,000 customer orders per week 14 weeks after opening.
CEO Tim Steiner says such productivity is helping to meet growing consumer demand:
Together, Andover and Erith provide new opportunities for growth in our UK retail business while showcasing the scalability, adaptability and efficiency of our platform. We are on track to deliver a significant number of new CFCs (Customer Fulfilment Centers) for our Solutions Partners in the coming years and as such are fulfilling our goal of changing the way the world shops. Ocado’s unique and proprietary technology, which makes these facilities work, is bringing greater value, quality and convenience to British shoppers while at the same time helping our partners redefine the shopping experience for their own customers.
It’s those partnerships that are vital to Ocado. The firm has plowed cash into its tech operations and is acknowledged to have a powerful platform that it can sell or license to third parties, including the likes of Morrisons in the UK. But investors and commentators have been waiting a long time to see the promised international take-up.
That’s starting to change. Deals of varying forms have been struck with Groupe Casino in France, ICA Group in Sweden and Sobeys in Canada. These are long game plays - the Sobeys deal, for example, is expected to take two years to complete the construction of just one CFC in the Greater Toronto Area (GTA) - and there’s no guarantee that any others will follow, although Michael Medline, CEO of parent Empire Company, suggests that online is corporate priority:
We are taking an omni-channel approach. In our bricks-and-mortar stores, we're investing capital to revitalize our stores with discount and conventional, and we're putting up a few key greenfield stores. We also invested in a game-changing Ocado engine e-commerce solution that positions us well to expand our presence in urban markets with the launch of our e-commerce solution in the GTA (Greater Toronto Area) in spring of 2020. These priorities are part of our offensive playbook and will help to position our companies to thrive in the future.
What is interesting is that this is an evolving relationship whose final terms and parameters haven’t been locked down - or at least not publicly. For example, Medline is evasive about what the finished entity will be called. Will it be Sobeys Online or Ocado or what? Medline says:
Ocado will be its own banner first of all. And by the way we've got to stop calling it Ocado. We have to have a name for it soon, so we can stop calling it Ocado, as much as I respect them.
He adds that the service that will be provided will be a “value” operation, not a discount one: :
There will be obviously be large overlap between the Sobeys SKUs (Stock Keeping Units) and some of Ocado. But Ocado, because of the way it's designed, has the ability to go far and beyond the numbers of SKUs that we could possibly have or anyone could possibly have in a grocery store. That's why I say, you'll be able to have a great shop with value, and get the products you want and it's going to be, just because of the nature of it, it's going to be highly exciting in terms of other products we'll be able to offer.
The big deal
The largest partner deal to date is wth US supermarket chain Kroger, which is planning to build at least 20 automated warehouses. This is a flagship project for Ocado as Kroger is the largest US supermarket chain by revenue and the second-largest general retailer after Walmart. Kroger CEO Rodney McMullen is currently driving through Restock Kroger, an initiative to “reposition” the chain by 2020. The deal with Ocado is a part of that wider ambition:
Everything we are doing is intended to create a truly seamless shopping experience, so we can serve customers anything, anytime, and anywhere. As we create a seamless experience, we will use our data to provide convenient and personalized food inspiration to help customers to be the hero to their families at meal time, every time...Partnering with innovators like Ocado will both accelerate our core business and serve as the foundational platforms for new opportunities.
The Ocado team continues to work on improving their model, using even better machine learning and everything else. There will be certain areas that they will be able to do same day end. I think the key thing gets back to... being able to deliver anything any time, anywhere. The key will be [to be] able to, for the customers, to do it in a seamless way. We'll use all of the assets, including Ocado, our store facilities, and other things to be able to get deliveries to the customers based on when they want it.
What we find is there are certain items that customers want more immediately, if you think about what's for dinner tonight. There are other things that you could help them plan out. And the thing that they're more focused on there is getting it in a convenient way. And a convenient way sometimes is picking it up, not necessarily at the store they shop at, and in some cases, delivery. So, the key is all of the backstage assets tying together but delivering it seamlessly for the customer.
So it’s a very, very big deal for Ocado. But again, it’s also a deal that isn’t locked down as Ocado CFO Duncan Tatton-Brown admits:
They’re making good progress identifying which particular sites and which particular cities. And we’re making good progress working on the details of the commercial relationship. There’s a lot of work going on because even though the final deal (service agreement) isn’t agreed, we are actually being paid.
All of which leaves a degree of uncertainty still hanging in the air and relying on investors to be willing to play the long game. As Laith Khalaf of Hargreaves Lansdown notes:
Ocado continues to experience growth in its UK operations, though it’s the promise of overseas expansion which has seen the share price treble in the last year. Ocado recently achieved promotion to the FTSE 100 and its equity market value is now greater than the likes of Morrison’s, Royal Mail and M&S. It still needs to turn overseas partnerships into profits, and details of its commercial relationships with US retailer Kroger are still being hammered out....Given its lofty valuation, Ocado needs to deliver on profits at some point, but in its current expansion phase, shareholders will cut the company considerable slack if it’s using its resources to boost its global footprint.
Ocado has been tagged as the ‘Microsoft of Retail’ and as we’ve observed on many occasions, its tech track record has given the firm a leading position in the online retail platform market. But rolling out automated warehouses is (a) time-consuming and (b) costly when they’re for Ocado’s own use. The signing of more third party deals is encouraging, but the devil’s in the detail and there’s not a lot of that around most of them just yet.
There’s no reason to assume that, for example, Kroger won’t turn out to be hugely lucrative in the end, but there are a lot of variables in play here, not least Kroger’s own lackluster performance of late. But with Amazon pushing into online groceries, Ocado remains well-placed to profit from the need for ‘legacy’ grocery chains to up their online game.