Don't be tempted to pick up shares in Ocado

Jun 11, 2010, 12:09

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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Back in March, when online grocer Ocado first said it was planning a £1bn float, I said I found the whole thing entirely bemusing and rather suspected that after firm words from a few of the banks, Ocado would quietly drop the whole idea.

It has not. Instead the company has hired almost every bank in the UK (not a bad move given that banks involved in IPOs rarely say nasty things about the firm paying their fees), alongside a smart PR agency, and is offering the chance to buy shares to staff and to any customer who spends, or has spent, £300 or more with the firm since the start of this year (assuming the float goes ahead).

That's unlikely to exclude anyone who has ever used Ocado (getting one of its smart vans to pull up outside your house might impress the neighbours, but it doesn't come cheap). But presumably a large number of Ocado shoppers have some degree of financial savvy – or they wouldn't be able to afford to shop there in the first place – so why on earth would they take up this far-from-tempting offer?

Ocado has now been around for ten years. It has devoured millions and millions of pounds in capital. And it has raised its revenues to a reasonably impressive £427m thanks to the excellent service it offers to London's well-off middle classes.

But it has never made a pre-tax profit. Never. Not once in ten years. And it is really hard to see how that might change. Grocery delivery is a competitive business and while Ocado is good, it isn't that much better than the others: I changed from Ocado to Sainbury's when we moved last year and I can honestly say that the only difference I have noticed so far is in the price.

It is also fair to say that the start of a decade of probable deflation may not be the best time to aim to expand a swanky home delivery service. So what happens when shares in Ocado float and fall – not an unlikely scenario given the state of the stock market? Will shareholder shoppers then desperately step up their spending in an attempt to shore up the business? Or will they switch to Sainsbury's in an attempt to make back their money via the cheaper prices of the Basics range?

There are benefits for Ocado in this float (one presumably being that its founders will get their hands on some money even without the fuss of making the business actually make any) but there are dangers too – one might be that as fast as they gain shareholders, they lose customers.

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  • 1. Nick

    (12 June 2010, 10:32AM)  Complain about this comment

    This looks very similar to the current IPO for Jupiter.

    A last-minute opportunity for the current founders/shareholders/employees to cash-out before a decade of falling sales and collapsing profits.

    It's difficult to imagine why the environment for a taxi delivery service for groceries or a fund manager with extremely high fees is going to better in 2015 than it is today.

    So what's in it for investors ?

  • 2. Steve Smith

    (12 June 2010, 12:53PM)  Complain about this comment

    This is another poorly researched piece of cheap journalism. It is perfectly acceptable to voice an opinion but to claim some credibility at least research the facts or show some ability to dig beneath the surface rather than crib by lines from other newspapers. This looks more like something you would read in the Sun or Evening Standard. Boring and irrelevant. To say the service or quality is comporable with Sainsburys is laughable - for a start Sainsburys dont offer 1 hour delivery slots...

  • 3. Merryn

    (12 June 2010, 06:05PM)  Complain about this comment

    Steve, perhaps they don't where you live but they certainly do where I live. I've been using them for over a year and always had a one hour delivery slot. They have never once been late (Ocado often was... they called to tell me but they were still late...). And Sainsbury's staff have been unfailing polite about carrying the shopping down stairs. So I think it is more than reasonable to say that Ocado doesn't have a monopoly on good service...

  • 4. Brian

    (12 June 2010, 10:37PM)  Complain about this comment

    Nice try, Steve. You don't work for Brunswick by any chance ?

  • 5. Bowks

    (13 June 2010, 02:29PM)  Complain about this comment

    I see you fail to mention the future plans for Ocado, speculative or not! A whisper about linking up with a French grocer for example, or how about the fact they only cover around 50% of the country so far? See past the malice, realise the commitment and decide for yourselves when... if the company moves into an IPO.

    Oh... yes, I do work for them, 6 years and bloody proud of where we're going!

  • 6. RussianFM

    (13 June 2010, 05:50PM)  Complain about this comment

    Looks like the ex-Goldman boys are well versed in dumping crap on their clients...

  • 7. Nick

    (13 June 2010, 08:11PM)  Complain about this comment

    "or how about the fact they only cover around 50% of the country so far?"

    They've covered the richest and most densely populated part of the UK for ten years and failed to make a profit.

    What on earth makes you think covering mid Wales or Northumberland is going to change things ? If anything covering the poorer 50% of country will just collapse margins further.

    Without wishing to sound unduly patronising please take anything your Goldman Sachs owners say to you with a pinch of salt.

  • 8. Ash T

    (14 June 2010, 11:52AM)  Complain about this comment

    Sainsbury's et al can afford to run grocery delivery as a loss making sideline purely because their stores are so profitable. Bricks and mortar works in the grocery world simply because all the complex logistics are handled by the shoppers themselves who travel to the stores and fill their own baskets. Ocado has a fundamentally flawed business model. They are effectively getting a handful of paid staff to do what millions of customers do for themselves when and how they want, which is bleeding money. This IPO is reminiscent of the dot com days: notice how they waited for stock markets to creep up to these levels before foisting this on us.

  • 9. Michael Lewis

    (14 June 2010, 02:24PM)  Complain about this comment

    "Oh... yes, I do work for them, 6 years and bloody proud of where we're going!"

    Would that be anywhere near a profit? You say yourself you've worked there for 1,2,3,4,5, 6 - 6 years, they're not inventing cold fusion, they're just delivering spuds and other stuff, if they can't make a profit in the last 6 years, why should anyone bother investing?

    I also think that for many people, the sort of goods you go to Waitrose for - you want to be in the store to select them.

    For the sort of goods that you don't mind being delivered/ordering on-lin, you may aswell order from Sainsbury/Tesco.

  • 10. smlaing

    (14 June 2010, 02:32PM)  Complain about this comment

    Only a fool would buy shares in a delivery service: no trading advantage, no patents, easily copied, prices can be undercut, need I go on. You wouldn't get them through the Dragons Den.

  • 11. Tiny Tim

    (14 June 2010, 09:06PM)  Complain about this comment

    @Bowks - internet businesses are the future but probably not for delivering your weekly shop. I guess everyone spends a little more in store because they are tempted by the offers they see but as I did with online shopping stuck to the list so no additional revenue is generated. Check how many months of cash is left in the bank - that will determine when the IPO is needed or the administrators will be called in.

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