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
PROMOTED VIDEO
News
REX/Eye Candy
science
News
A photo of Charles Belk being detained by police on Friday 22 August
news
News
i100
Sport
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
Extras
indybest
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Google Doodle celebrates the 200th birthday of Irish writer Sheridan Le Fanu
tech
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
News
i100
News
In Eternal Sunshine of the Spotless Mind Jim Carrey and Kate Winslett medically erase each other from their memories
scienceTechnique successfully used to ‘reverse’ bad memories in rodents could be used on trauma victims
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
tv
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

C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

£40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

£45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

£50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

Day In a Page

Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone
Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

What is the appeal of Twitch?

Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

How bosses are making us work harder

As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
Manufacturers are struggling to keep up with the resurgence in vinyl records

Hard pressed: Resurgence in vinyl records

As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

A tale of two writers

Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
Could a later start to the school day be the most useful educational reform of all?

Should pupils get a lie in?

Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
Prepare for Jewish jokes – as Jewish comedians get their own festival

Prepare for Jewish jokes...

... as Jewish comedians get their own festival
SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

A dream come true for SJ Watson

Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
10 best cycling bags for commuters

10 best cycling bags for commuters

Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

Paul Scholes column

Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?