The U.K.'s grocery delivery tech whiz should soak up the Amazon sunshine while it lasts. Because as every Brit knows, dark clouds are soon to follow.
Ocado Group Plc has joined the wild ride sparked by Amazon.com Inc.'s Friday announcement that it will pay $13.7 billion to buy Whole Foods Market Inc. A big part of the story here is that investors seem to have decided that it could be the next network to be gobbled up by Jeff Bezos's online grocery rampage, and they've duly sent its shares up as much as 9.5 percent on Monday.
Amazon shouldn't listen. It should skip over Ocado, and buy wholesaler Booker Group Plc instead.
Of course there's some logic on the face of it: Ocado would give Amazon an established grocery delivery network that is well regarded for its customer service.
But it doesn't cover the whole country, as Wm Morrison Plc found out to its cost when it picked Ocado to run its online grocery operations. Morrison restructured the deal almost a year ago to deal with gaps in Ocado's network of warehouses.
Booker looks a better bet. Buying it would give Amazon a supply chain and distribution network for frozen, chilled and fresh food, from the most basic items to top-range goods, capable of delivering right across the U.K. The company also throws off cash, unlike Ocado, which last week raised 250 million pounds ($319.8 million) in the bond market.
There would be a few wrinkles to be ironed out.
Booker's small-business focus means there would need to be some work done to shrink pack sizes and make them suitable for Amazon's customers, who buy groceries through its Prime service.
But a combination of Amazon's online expertise and the managerial talent of Booker Chief Executive Officer Charles Wilson -- if he were to remain with the company -- would be able to work these out.
The Whole Foods deal has shown that Amazon is willing to take on physical stores alongside building its online grocery business. Booker measures up here, since it supplies 120 Budgens and almost 5,000 Premier and Londis convenience stores. These could be useful Amazon pick-up points. And the Whole Foods deal means Amazon already gets nine locations in affluent parts of the U.K., predominately in London.
If Amazon really wanted more, there would be nothing to stop it adding a physical supermarket to the mix, say by buying Morrison, which already supplies it with products, and whose store base is primarily outside the capital. Morrison was the only grocer not to see its shares pummeled on Friday, suggesting that investors may have already warmed to this idea.
Another option might be upmarket supermarket Waitrose, owned by the privately held John Lewis Partnership, which has endured more challenging trading conditions over the past couple of years.
Even if Amazon were to buy both Booker and Morrison, assuming a 30 percent premium, that would cost it about $15 billion, not that much more than it is paying for Whole Foods. It could certainly afford that.
Of course, Booker has thrown its hat in with Tesco Plc, agreeing to a 3.4 billion pound merger.
But that deal isn't universally popular with either Tesco or Booker shareholders. Based on the closing prices before the January announcement, the offer was worth about 205 pence per share. With the 17 percent decline in Tesco shares since, it is now worth about 191 pence per share, leaving scope for an interloper. There's also a lengthy competition inquiry to contend with.
Monday's share move could also reflect hopes that Ocado could win a consolation prize -- other big supermarket groups may now be more inclined to get it to run their delivery business and beef up their defenses against Amazon. But that's wishful thinking. The Amazon threat's been known for a while, and if they'd wanted to do a tieup with Ocado they would have done it already.
Bezos has plenty of options to extend his great grocery assault in Britain -- but Ocado shouldn't be one of them.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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