Ocado delivers on its debts but profits aren’t in the bag

 
Marc Sidwell
Follow Marc
BEFORE anyone gets too excited about Ocado’s share price rising by more than a fifth yesterday, the troubled online grocer is still trading at less than half its original float price of 180p, which was itself at the bottom of the hoped-for range back in 2010.

Yesterday’s raising of £35.8m staved off Ocado’s most immediate problems, after it had been forced to deny speculation at the weekend that it was close to breaching its debt covenants. The arrangements announced yesterday morning explained its confidence, with the banks agreeing to extend its borrowing facility for another year and a half.

But the placing of 55.87m new shares was achieved by turning to investors who had already committed themselves to Ocado. It was about doubling down, rather than being the sign of wider confidence the firm really needs.

That reflects a general problem for Ocado. The company hit an all-time high of 140,000 orders in one week this November, but it still remains to be seen whether it can scale its way to significant profit.

The debt extension should give it time to open its 400,000 square foot distribution centre in Dordon, Warwickshire in 2013, which can serve 200,000 more weekly orders. That would make quite a difference in revenue, if the orders come in, but only if the costs to reach new customers don’t mount up too fast.

Ocado committed itself to a radically different business model for online delivery, operating solely from distribution centres to cut out the cost of public stores. It also took a slow and steady approach, rather than trying to build out as fast as possible in the manner of the notorious US dot-com flop Webvan. Both of these were supposed to hold costs down, but while steering away from one set of dangers, Ocado has veered dangerously close to the opposite verge. Slow and steady growth to a fixed plan only works if the world of grocery stands still around you. Today the online delivery space is increasingly hard-fought, and its competitors are growing faster. Meanwhile chains like Tesco are evolving click and collect models that storeless Ocado cannot compete with. Buying some time is a start, but Ocado still has a lot to deliver.

CHINESE DIET
HSBC’s talks over selling its 15.6 per cent stake in Chinese insurer Ping An fit with a year in which it has shed 40 assets. It is on a post-crisis diet, but this move is not a signal of swearing off Chinese growth.

HSBC is boosting its capital – its stake in the insurer is worth an estimated £5.6bn – and focusing its attention in the middle kingdom. At the start of the year, Stuart Gulliver said he wanted to either grow HSBC’s 20 per cent stake in China’s Bank of Communications, or increase HSBC’s Chinese branch network. Whichever regulatory hurdle proves lower will determine what HSBC sheds next.