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Ocado's Delivery Is Three Years Late And Missing Items: Gadfly

After being stuck in the warehouse for more than three years, Ocado Group Plc's delivery has finally arrived: an international contract.

But it's more of a top-up shop than a trolley full of goodies.

Ocado tantalized investors with an announcement on Monday that the company will start running the online operations of a regional European retailer. The shares rose as much as 7.6 percent, the most in about a year.

For Ocado, this deal needs to be the first of many.

The internet-only grocer didn't identify the customer involved. The deal doesn't even cover the whole of Ocado's services. The company will only provide software to help the customer run its website and app, forecast stock levels, and route its delivery vans. The customer won't install Ocado's technology in its own warehouses. That might come in time, but there's no guarantee.

Financial details are also light: the new partner will make an upfront payment for accessing Ocado's technology, together with fees based on the volume of products sold online. The arrangement will be earnings and cash neutral over the next two years, and accretive thereafter.

Share Boost

Monday's gain added almost 70 million pounds ($90 million) to Ocado's market value. Ocado's enterprise value is almost one-and-a-half times forecast sales, almost three times the average for its peer group, according to Bloomberg data.

To justify that premium, Ocado needs more international agreements as the economics of full-service grocery delivery become increasingly difficult.

Wm Morrison, the British grocer that was the first to use Ocado's services, renegotiated its contract last year -- and on much less favorable terms for Ocado. The contract will account for almost a third of Ebitda this year, according to analysts at Bernstein.

Then there's the pressure from the internet giants: Amazon.com Inc. announced separately on Monday that it will expand its Amazon Fresh grocery delivery service beyond London and Surrey to add Hertfordshire and Bedfordshire.

Ocado says it's still talking to multiple parties in the U.S. and Europe. Of course, now that it has secured one partner, others may come more easily. But that remains to be seen, and investors could be forgiven for thinking they have heard this all before.

Ocado does have another option, rather closer to home. Marks and Spencer Group Plc will start an online food delivery trial later this year. M&S CEO Steve Rowe says the service will be "very, very, very small."

But if Rowe really does decide to go ahead with an online food service, and teamed up with Ocado, it would be one substitution shareholders could more than live with.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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