THE former Goldman bankers behind Ocado certainly have chutzpah. Trying to reach a £1bn valuation in a flotation is a tall order for pretty much any firm in these times; to do so without having turned a single penny of profit is nothing short of brazen.
Ocado’s product is top-drawer in many respects, there’s no doubt about that. Its Amazon-style approach to food retailing, which sees customers receive produce from a 26 acre warehouse in Hatfield, means goods are much fresher than they would be under different online shopping models.
Other supermarkets wait for produce to be delivered to their branches before making up the customer’s order, meaning the goods are often much nearer their sell-by date when they reach the buyer.
Financial performance is also improving, with underlying profits having doubled from more than £2m to between £4m and £5m in the first half of the year. Although it will still book a pre-tax loss, it operates in one of a few fast-growing industries: in an otherwise sober set of first quarter results last week, J Sainsbury said its online grocery business was growing by 20 per cent a year.
Having agreed a ten-year supply deal with Waitrose, the firm has also given potential investors extra visibility. That said, the agreement contains a clause that lets Waitrose compete against Ocado in the M25 using its own online channel Waitrose Deliver. Quite how Ocado will deal with this competitor-customer is currently unclear.
Fears that the firm will go the same way as Travelport, Merlin Entertainment and New Look – which all had to pull their IPOs due to shaky market sentiment – are hardly unfounded. But management points out these companies had been highly-geared by their private equity backers while Ocado has just £15m of debt.
They’d better hope the market shares their confidence.