Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Is someone finally ready to buy what Ocado is selling? Or should we chalk up a 9 percent jump in shares of the British web grocer to wishful thinking on behalf of investors? 

Ocado's stock shot up on Monday after reports surfaced it was close to signing a deal to run online sales for U.S. supermarket Publix, an 1,100-store, employee-owned chain with $33 billion in annual revenue. But like previous whispers about tie-ups with Carrefour and Amazon, there's no indication these rumors are true. 

Lonely Grocer
Shares in British online grocer Ocado are down 11 percent in the past year
Source: Bloomberg

Ocado wants to show it's more than an online grocer at the mercy of Amazon. Instead, it wants to be the Amazon Web Services of the bread aisle, a provider of software and delivery services to big supermarkets around the world.

But investors have grown impatient with Ocado. In February 2015, its CEO said it was ready to strike a flurry of deals with grocery stores outside the U.K., with the first one promised by the end of that year. But 2015 came and went without a deal, and the company's share price sank. It didn't help when Amazon announced this past February it would start selling products from British supermarket chain Wm Morrison, which until then had used Ocado exclusively to run its online deliveries.

After falling about 56 percent over two years, Ocado's stock started climbing in February on the deal rumors. But so far the deal chatter has been just that -- chatter. 

The thing is, U.S. supermarkets could definitely use the help with online grocery. Publix and others would be wise to hurry up and get on the Internet food-sales bandwagon; it's only a matter of time until Amazon dominates the grocery market just as it did bookstores.

Right now, online sales are meager in the U.S., hovering around 2 percent in major markets such as New York and San Francisco, compared with nearly 5 percent in the U.K., where the practice has been commonplace for longer. The percentage of sales that occur online is even larger for companies such as U.K. grocer Tesco, which Bloomberg Intelligence analyst Charles Allen pegs at around 10 percent of grocery sales.

Taking A Bite Out of Grocery Sales
Internet food sales in the U.K., as percentage of total retail sales
Source: Bloomberg Intelligence

It took decades for U.S. retailers such as Walmart, Target, and Costco to realize the heft of Amazon and start taking e-commerce seriously. Convincing them, along with traditional grocers such as Publix, to dive faster into online grocery, which comes with the added challenges of keeping items cold and fresh, is also likely to be tough going.

It's an especially hard task for Ocado, which has little to no experience in the U.S., where grocery chains tend to operate more by region, even if they are owned by a national chain.

A number of the biggest grocery-sellers in the U.S., including Walmart, Kroger, and Ahold, have decided to try running online groceries on their own -- perhaps learning a lesson from ill-fated industry tie-ups such as Target's decision to outsource its website to Amazon.

Plus Ocado already has plenty of competition from upstarts such as Shipt, Postmates, and Instacart, which recently inked a multi-year deal with Whole Foods and has been delivering groceries for big retailers such as Target and Costco.

Ocado has managed to turn a profit in the past two years, which is more than many retailers can say about their online grocery delivery businesses. And its profit margins are higher than those of most grocers (Ocado's gross margins stood at 34 percent last year, compared with Kroger's 22 percent).

In The Bag
2015 gross profit margin by grocer
Source: Bloomberg

So perhaps Ocado is doing something right. But unless it can convince others of its promise, it's unlikely to deliver the kind of international partnerships for which shareholders are waiting. 

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

To contact the authors of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net