Ocado must start delivering the goods

Shares in the loss-making online grocer soar as banks extend debt deadline, but there are still concerns over its business model, says James Thompson

Since it floated in July 2010, Ocado has not had too many days for celebration, despite continuing to deliver double-digit sales growth. In theory, yesterday should probably have been a day for high-fives as the online grocer's banks extended its debt facility by 18 months to 2015 and the company unveiled a £36m fund-raising.

Following months of speculation that Ocado could breach its loan terms, Tim Steiner, its chief executive, described the share placing and the extension to its debt maturity as "a strong endorsement from both its institutional and other shareholders and its lenders who support our confidence in our business model and growth prospects".

A surge of 14.5p, or 24 per cent, to 75p in its shares seemed another reason to crack open the bubbly at Ocado's high-tech distribution centre in Hertfordshire.

But it remains a country mile from its 180p flotation price and is still loss-making.

It's fair to say there are plenty of sceptics about the business model. They argue that Ocado, which delivers Waitrose and own-label groceries, is losing market share to rivals, such as Sainsbury's. They also contend that as Waitrose continues to grow its online grocery operation and stores estate rapidly, consumers will migrate to its own service.

Mr Steiner, one of three former Goldman Sachs bankers who founded the company in 2000, has always maintained that when Ocado and Waitrose vans operate in the same area, they both benefit from increased awareness of the brands.

Indeed, he said yesterday, it is between "five and 10 times" easier to acquire shoppers from the likes of Sainsbury's and Tesco, who are familiar with buying groceries on the internet, than it is to convert the unconverted.

That said, Tesco has a near-50 per cent share of the online grocery market, compared with Ocado's 14 per cent. Despite this, the market is growing rapidly. Online grocery spend is forecast by the trade body IGD to rise to 6 per cent of the total grocery market by 2016, up from 3.8 per cent last year.

However, the profitability issue continues to dog Ocado. While the online grocery has made a profit in isolated quarters, Numis forecasts a loss of £6.4m for the financial year just ended. With its Hatfield site running close to full capacity, the internet company is building a second distribution facility in Dordon, Warwickshire, at a cost of £210m. This is to deliver increased capacity and efficiencies, which will come through on its profit margins, as sales volumes grow massively.

But Clive Black, an analyst at Shore Capital, says: "Ocado is a business that delivers a good service for customers but not for shareholders. It has spent a huge amount of money on its existing distribution centre and the second site in Warwickshire is not short of money either at £210m. This is a gargantuan amount for a distribution centre."

Certainly, Ocado has already burned through hundreds of millions of pounds over the last decade, such as on IT systems, warehouse machinery, marketing and its huge fleet of delivery vans. In fact, its dedicated warehouse model – based on Hatfield as the hub with a handful warehouse spokes around the country – is radically different to the largely pick-in-store model used by Sainsbury's, Asda and Tesco. This means that supermarket giant's staff are able to fulfil online orders in store, which their vans deliver to houses in the local vicinity.

While Ocado argues it does not suffer the supermarkets' cost of staff putting items on shelves and food wastage, it incurs huge costs associated with its vans, including drivers, petrol and vehicle service charges, in delivering to consumers – often over much longer distances. That said, no doubt yesterday was a positive day for Ocado, after its lenders, Barclays, HSBC Lloyds, agreed to extend the deadline of its £100m capital expenditure facility by a further 18 months to July 2015.

The online grocer also plans to raise £35.8m through a placing of 56 million shares – 10 per cent of its equity – with certain existing shareholders, including board members, and will invest it in expanding its ranges, particularly non-food items, improving customer service and marketing.

Duncan Tatton-Brown, Ocado's finance director, said: "I would not describe it as a lifeline. I can categorically state we would not have breached covenants." These covenant tests were due in early December and included one based on the ratio between Ocado's net debt, which stands at £93.4m, and underlying earnings.

However, until Ocado makes a pre-tax profit and then repeats the feat, its doubters are likely to remain in full voice.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
food + drink
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
News
UK Border Control
i100
Sport
boxing
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn