The world has been moving faster than ever. According to McKinsey, US e-commerce penetration achieved 10 years’ worth of growth in the first 3 months of lockdown. This was particularly the case for UK supermarkets too, where online grocery sales soared from 7% to 12.5%.
As a result, opportunity opened up within the sector, which Ocado unhesitatingly snapped up. This can be seen as this week their valuation exceeded that of Tesco, at £21bn compared to £20.9bn respectively, placing it as the most valuable food retailer on the UK stock market.
In the last two years, Ocado’s share price has risen from roughly 900 to 2800 GBX. This has
provided investors with a 211% return on equity, 155% of which has been since March. To put this into context, since the pandemic hit Amazon has achieved a 63% increase in share price.
So, how did Ocado manage this? Firstly, through its use of technology. Ocado’s business model is stringent with no physical stores and a purely online presence. The e-grocer is building more than 50 fully automated order-picking warehouses worldwide, the first being built outside of Paris this year. These investments will reduce costs in preparing orders, allow it to meet orders more quickly, and increase its scope of service. In comparison, Asda, Tesco and Sainsbury still use the traditional system of “picker-packing” internet orders in-store.
Nick Harrison from Oliver Wyman estimates that it costs over £10 to pick and fulfil each online order for the ‘Big 4’ supermarkets. This offers Ocado the opportunity to undercut through the use of automation. In fact, many investors actually consider Ocado to be a technology stock rather than a retailer.
Another reason for this boost in valuation is its overseas expansion. The 9 international deals signed in the last few years include: Groupe Casino in France, Kroger (the largest US food retailer) in the US to Aeon in Japan. However, these international investments will take years before profits can be realised, as with Casino and Canada’s Sobey’s. Therefore, it will be essential that Ocado can remain nimble in responding to changing market demands.
It must be added that whilst the market cap of Ocado flirted around Tesco’s £20bn+, the grocery giant still shadows the online retailer in almost every other aspect. For example, Ocado supplies >2% of the groceries sold in the UK, whereas Tesco covers nearly 27%. Yet, this highlights just how important Ocado’s disruption to industry may prove.
The future implications of this need debating. Is this share price inflation an over-valuation of Ocado’s underlying business, or is it an intelligent bid for future profits materialising from domestic and foreign expansion? It may be interesting to analyse how this automated distribution technology could be introduced in economies, such as China and India, where food allocation faces phenomenal challenges. Will the current trend of online shopping prove to be permanent, or is this a fad of the pandemic? How will Ocado hold up to potentially increasing demand, with competition intensifying as Aldi and Lidl enter the online market?
Ocado’s recent success is leading to some important discussions on the future of our weekly shop. In an industry which effects everyone in this country to some degree, it’s definitely one to watch.
Image thanks to TechHQ. Accessed 14th October 2020. https://techhq.com/2020/05/ocado-on-why-it-uses-java-to-control-its-robotic-swarms/