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Stock take

11 June 2020 By Aimee Donnellan

Ocado has picked a good moment to cash in on the grocery delivery boom. The UK online supermarket announced on Thursday it had raised over 1 billion pounds from investors. The cash will let it take advantage of a surge in demand for online groceries – and particularly for its robotic warehouses. But financing the expensive kit will shunt investors’ returns into a delayed delivery slot.

The company run by Tim Steiner has had a good coronavirus crisis. A surge of customer appetite prompted by the Covid-19 lockdown forced it to temporarily shut its UK website, while Ocado delivery slots became as scarce as toilet roll. According to data provider Nielsen, 13% of all UK grocery purchases are now done online, nearly double the volume before the pandemic. Other developed economies have experienced similar booms.

This is good news for Ocado’s core business of building warehouses for other retailers trying to efficiently fulfil online orders. The company already has orders for 54 centres from supermarkets like America’s Kroger. But to fund an expected increase in demand – and take advantage of a share price that has almost doubled since the end of February – the company tapped equity investors for over 650 million pounds and raised a further 350 million pounds in convertible bonds.

Ocado warehouses, which often contain as many as 3,000 robots, cost the company around 30 million pounds to build. Once the unit is operational, typically after about three years, Ocado starts levying an annual service charge equivalent to around half of the up-front cost. As a result, it typically takes around five years for the investment to start generating a cash return. Given Ocado only has five fully operational fulfilment centres, the growth spurt will consume cash. Last year it made a pre-tax loss of 215 million pounds.

The boom in online shopping bodes well for Ocado’s business. In the United States, 90% of customers that bought groceries online during the pandemic say they will continue to do so. In Europe, around half of existing shoppers that have increased their online grocery activity said they would continue after the outbreak is over, according to data from Nielsen. However, investors are pricing in a lot of hope. After a 6% share price dip on Thursday morning, and taking account of the new shares issued, Ocado’s equity is valued at around 14.4 billion pounds – almost 7 times this year’s expected revenue, according to Refinitiv. The bet is that the pandemic will bring Ocado bigger rewards. The problem is that investors will have to wait longer to see whether they materialise.


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