City unconvinced by Ocado proposition

City unconvinced by Ocado proposition

UK online retailer Ocado reported smaller full-year losses this morning (7 February). And, with its second distribution centre looking set to open this month, the grocer seemed optimistic that it will be well-placed to take advantage of the interest in e-commerce that has come to mark the UK grocery sector. However, there were those in the City that remain decidedly unconvinced.

Panmure Gordon analyst Philip Dorgan

"FY2012 was another difficult year for Ocado. It failed to deliver accelerated sales growth and it needed to raise money. On sales of nearly GBP700m, ignoring exceptional costs and including capitalised costs, it makes just GBP1m of profit. We think that the debate now moves on to whether its assets are attractive to either Marks and Spencer or Morrisons and, if so, at what price?"

Shore Capital analyst Darren Shirley

"Ocado's stock has appreciated nicely from its recent low since its fund raise in November 2012. That injection of equity took 'heat' off management, so providing it with room to try and prove that this is a business that can make a satisfactory return for shareholders. In the intervening period Ocado delivered what we deemed to be a rare piece of good news with the announcement of the appointment of Sir Stuart Rose as the group's new chairman from May 2013.... [However] we believe Ocado's centralised fulfilment model is too far away from its customers. More to the point, the rise of click and collect (C&C) from the supermarkets represents an increasing competitive challenge for Ocado as does the growing momentum in its online space of Waitrose. So, do we expect margins to materially build any time soon to make the Ocado model produce more satisfactory returns? Well, no."

Matt Piner, research director at Conlumino

"There is no doubt that Ocado is making progress. It continues to hone the efficiency of its innovative delivery model, tap into the growth of online and mobile shopping and build its brand and range of products. However, in an intensely competitive sector, its weak profitability remains a concern....The challenge for the e-retailer remains whether it can actually take advantage of all these opportunities in a comprehensive and profitable fashion. It is facing some pretty hefty rivals in its core market and, in a multi-channel world, Ocado's lack of stores could end up being the decisive disadvantage. In contrast the likes of Tesco, Asda and Sainsbury's can be adaptable in meeting in consumer demands, with an example being Tesco fulfilling 5% of orders through its click-and-collect drive-through service over Christmas. At present, this flexibility remains out of Ocado's reach.There is no doubt that Ocado is a progressive, forward looking business. However, it is difficult to see how it can continue to improve sufficiently without some sort of partnership with a bigger competitor."