Ocado turns a profit from online groceries thanks to shortcomings of Morrisons

Profile picture for user slauchlan By Stuart Lauchlan February 4, 2015

ocado
On the road to success

Online-pureplay supermarket Ocado chalked up a significant milestone yesterday as it turned in its first profit in its 15 year history, its success boosted by the digital shortcomings of offline firm Morrisons.

The online grocery business was founded in 2000 by three former Goldman Sachs bankers, including chief executive Tim Steiner, who said:

It has been a journey. There have been some sticky moments. Building a business from an idea into a company that employs 8,500 people, does £1 billion of sales and has a market capitalisation of between £2 billion and £3 billion, I don’t think it’s ever plain sailing.

But finally a profit has appeared. Pre-tax profit was £7.2 million for the 12 months to 30 November, compared to a loss of £12.5 million during the equivalent period a year earlier.

Sales went up from £843 million to £972.4 million while earnings before interest, tax, depreciation and amortisation rose from £45.8 million to £71.6 million. Ocado says it delivers more than 1.1 million items a day on average, shipping 150,000 orders a week.

But the profit comes in large part from the digital shortcomings of Morrisons, the fourth largest supermarket chain in the UK, which signed a £200 million contract for Ocado to handle its online delivery service. Since its inception, Ocado has had a delivery relationship with Waitrose.


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Steiner said the firm is open to doing other similar deals to the Morrisons arrangement:

The successful launch and smooth ramp up of Morrisons.com was particularly encouraging and paves the way for future agreements to commercialise the value of our intellectual property.

Technology is going to get better, the relative merits of shopping online versus going in store are going to grow and stores are going to come under more competitive pressure.

Overall, we are well equipped to continue to lead the online grocery revolution, in the UK and overseas, as increasing numbers of customers shift away from traditional forms of retailing. We are confident that we have significant opportunities for growth in sales and shareholder value.

A tech firm?

What is interesting here is that when Ocado talks about such partnerships it is talking about others using its technology, not directly delivering a service for third parties.

The company defines itself as a technology firm, not a grocer. It currently predicts that it will employ 700 IT staff by the end of this year, up from 550 at present, to work on its Ocado Smart Platform.

Steiner explained:

The development of Ocado Smart Platform, enabled by our IT re-platforming and fulfilment solutions projects, positions us well to take advantage of future opportunities as the demand for online grocery shopping increases internationally.

Overall, we are well equipped to continue to lead the online grocery revolution, in the UK and overseas, as increasing numbers of customers shift away from traditional forms of retailing.

Our capabilities are being significantly enhanced and broadened with the ongoing development of our new modular, scalable physical fulfilment solution. This system has benefited from our extensive design and engineering experience, which has enabled us to develop a proprietary solution with many beneficial attributes when compared to existing infrastructure assets or any commercially available alternatives.

Successful development of this infrastructure solution will vertically integrate our platform of software, electronic and mechanical systems required to operate online retail operations efficiently, enabling a compelling proposition to the consumer and our partners. Our solution combines extremely dense storage, rapid retrieval and fast picking of single items. We believe it is the most capital-efficient solution available.

The constituent elements of this infrastructure solution are currently undergoing significant testing and we are confident in their key performance capabilities. We have filed for patents across our innovations, driven by the desire to protect the IP intrinsic to our infrastructure solution. As more patents are filed we are building a web of protection for our valuable IP in the future.

Morrisons
Trollied

Rather embarrassingly, the good news about moving into the black was prefaced by a technology failure at one of the firm’s warehouses that impacted 1700 customers last Friday.

Apparently a:

computer chip went awry.

Whatever that means.

In a longer statement, Ocado’s PR flacks said:

Although the vast majority of customers last week received their deliveries on time, despite the snow in large parts of the country, a minor technical fault at our Hatfield Customer Fulfilment Centre on Friday caused issues for a small number of our customers.

The fault was fixed within a day and affected customers have been contacted to rearrange delivery. We are very sorry for the inconvenience caused and we have offered a money-off voucher as compensation to those affected.

Not all market watchers were impressed by the profit news. Shore Capital analyst Clive Black said

After 15 years of talking about EBITDA, Ocado can now speak of pre-tax profits. Yes, following a decade and a half of trying, Ocado has worked out how to deliver baked beans, ice cream, Jaffa Cakes and chipotle chillies without booking a bottom line loss.

That’s slightly chippy as a comment given that Ocado has been expanding its online footprint into other areas. Last year, it launched two, specialist non-food retail sites, online pet store Fetch and kitchen and dining shop Sizzle, and is about to set up a beauty and wellbeing retail website with magazine brand Marie Claire UK, via one of its subsidiary companies, Specialty Stores Ltd.

My take

As someone who works from home, Ocado is my lifeline every two weeks for a 'big shop'. Ironically the 'little shops' take place at Morrisons, although I'd never think of using its online delivery service at all.

But the profit news is a worthy reward for what has been 15 years of pretty pioneering investment and innovation from Ocado.