In focus: Ocado

In its new Ocado profileRetail Week Knowledge Bank concludes that there are various unresolved issues of concern.

Firstly, the IPO has resulted in a medium-term funding shortfall, with only £200m raised rather than the £300m targeted. Had the latter been achieved, projected medium-term development costs would have been essentially covered.

Secondly, the ongoing programme to build required scale may well mean that, at the pre-tax level at least, Ocado will continue to be loss-making until its new Midlands distribution centre is bedded in. But this might not be operational until 2013 or later, let alone profitable. This is just three or four years before the current supply agreement with Waitrose could end, which runs to 2020 but can be terminated before then, from 2017.

Thirdly, Waitrose already has its own home delivery system that, presumably, it intends to extend and it could be developed to conflict directly with Ocado. Moreover, each time its agreement has been renegotiated early to date, the cost to Ocado has risen significantly.

Fourthly, Ocado’s staff costs to sales ratio seems out of line: at 20% it is almost double the 11% average for the big four supermarket chains, which all have hundreds of stores to staff.

Consequently, Retail Week Knowledge Bank considers that the relatively short length of the existing Waitrose supply agreement and unsecured longer-term position, set against Ocado’s continuing funding requirements coupled with high operating units costs and the prospect of further pre-tax losses going forward towards the existing agreement’s termination dates, collectively represent a uniquely soft underbelly for a newly quoted retailer.