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Ocado Shows Amazon's Not the Grocery Killer We Feared: Gadfly

Published on Jan 31 2017 1:30 PM in Retail tagged: Trending Posts / E-Commerce / Amazon / Ocado

Ocado Shows Amazon's Not the Grocery Killer We Feared: Gadfly

Amazon.com Inc.'s foray into selling fresh food in Britain hasn't killed off Ocado Group Plc. That's the message from the UK online grocer's full-year results on Tuesday.

Ocado's pre-tax profit before one-off losses rose from 11.9 million pounds ($14.8 million) to 14.5 million pounds in the year to Nov. 27, well ahead of the consensus of analysts' forecasts -- though a 2.4 million-pound one-off loss makes the performance not quite so impressive. The shares rose as much as 9.2%, the most since May.

It’s still a decent showing, considering the behemoth that's moved into Ocado's backyard. Its resilience should give hope to some other UK companies battling Amazon, such as food delivery firms Just Eat Plc and Deliveroo.

Getting fresh food to the customer is notoriously difficult, and whatever Ocado's shortcomings, there is no denying it has cracked it. It will take time for Amazon to catch up. That has been the case in the US, and it is likely to be true for Europe, too.

That's in stark contrast to areas such as toys and entertainment, where Amazon remains a potent force. This is bad news for Ocado's rival J Sainsbury Plc, which has pinned its colors to the non-food mast with its purchase of Argos.

But the threat from Amazon to the food retailers -- including Ocado -- shouldn't be ignored. Its online food services have been gradually gaining traction.

This makes it all the more pressing for the UK firm to clinch a contract to provide internet services to a big international grocer. Ocado said Tuesday it was now more confident about finding such a partner, and hoped to sign multiple deals in the medium term.

But we've been hearing this for years. Unfortunately for Ocado's investors, that delivery continued to be stuck in the warehouse on Tuesday. If ever there was a time to clinch a deal, it's now. The slump in the pound after the Brexit vote makes paying for its sterling-denominated services cheaper to potential customers outside the UK

And there were also some niggles in Ocado's performance last year. The average basket size fell by 2.7%. The company says this reflects the impact of falling food prices and takeup of its Smart Pass, where customers pay a fee for free delivery.

Net debt has also increased, rising to 164.9 million pounds from 127 million pounds the previous year, as Ocado invests in new distribution centers. Capital expenditure will also step up to 175 million pounds this year, compared with 153 million pounds in 2016. The nature of Ocado's business means that it has to keep investing in new infrastructure, which is another concern for investors.

Ocado's enterprise value is 1.2 times forecast revenues, a steep discount to Amazon's 2.3 times. That is warranted, given that Amazon's tentacles reach into many facets of retail, not just food. Ocado needs an powerful overseas contract to have any hope of closing this gap.

But the fact that it's been able to weather Amazon's European grocery assault so far gives it some breathing room until it can finally bag its big international deal.

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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