Reality Check

Ocado's Rose-Tinted Glasses

If U.S. grocers had wanted to pursue a tie-up they would have done so by now.
Photographer: Chris Ratcliffe/Bloomberg
At Closing, May 25th
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At Closing, May 25th
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Tim Steiner, chief executive of Ocado Group Plc, likes to look on the bright side.

On Wednesday, he was putting a positive spin on Inc.'s $13.7 billion purchase of Whole Foods Market Inc.

Rather than quaking because Amazon is finally getting serious about conquering the online grocery market, Steiner saw the deal as heralding fresh opportunities for Ocado.

Bucking the Trend

Ocado shares have outperformed rivals since Amazon's Whole Foods deal was announced

Source: Bloomberg

The thinking goes that U.S. grocers seeing Amazon encroach on their territory through the Whole Foods deal will need to increase their online capabilities in response. One way to do this is by employing Ocado to run their internet grocery services.

That looks like wishful thinking on Ocado's part.

Icarus Complex

Ocado's premium assumes new contracts or a bid. Neither look likely

Source: Bloomberg

The London-listed distributor has been in talks with European and U.S. supermarkets to run their online businesses for at least three years. It had originally hoped to sign a deal by November 2015, but didn't announce a contract until last month, and then it was with a regional European retailer rather than a global heavyweight. It was also less extensive than what was hoped for.

As Gadfly has argued, even before Amazon snapped up Whole Foods, the U.S. giant had been moving further into grocery through its Fresh service. If U.S. grocers had wanted to pursue a tie-up with Ocado, they would have done so by now.

Amazon's interest in Whole Foods also shows that it wants to buy stores and a supply chain, not the sort of whiz-bang automated warehouses that Ocado offers.

Steiner insists that Ocado has never been trying to sell itself. But from its earliest days, the company looked more suited to being the technology arm of a big retailer than a stand-alone firm.

One hope lies closer to home: Marks & Spencer Group Plc is exploring retailing its high-end food online. That's always been a possible opportunity for Ocado, and a contract to run M&S's internet food offering would be a worthy consolation prize.

One of the Leaders

The U.K. is second only to China in the development of online food retail

Source: Bernstein

Ocado certainly needs to do something. True, it hasn't been annihilated by Amazon, as some had feared, but it faces challenges.

Profit Progress, Sort Of

Ocado's first-half pretax profit fell year-on-year

Source: Company reports, Bloomberg

Although sales rose from 584.2 million pounds ($755 million) to 713.8 million pounds in the half year to May 28, pretax profit fell from 8.5 million pounds to 7.7 million pounds. The decline was due to a higher depreciation charge from a new warehouse.

And external net debt -- excluding obligations under the contract to run Wm Morrison Supermarket Plc's online arm -- almost doubled to 102.4 million pounds from November 2016. Ocado raised 250 million pounds through a bond issue last month to help meet its capital requirements, which will amount to 175 million pounds this year.

Ocado trades on a forward price earnings ratio of 142 times, dwarfing the Bloomberg Intelligence European food retail peer group on 17 times.

Such an elevated rating assumes Ocado signs a string of lucrative distribution deals, or sells itself. For now, both outcomes look unlikely.

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

    To contact the author of this story:
    Andrea Felsted in London at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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