But for anyone given to debunking investment dogma, the group's experience as the only pure-play online grocery distributor could prove instructive. Ocado was certainly one of the first entrants in this market space, and there are those who view first-mover advantage as an incontestable benefit. Faith in the group's long-term prospects has been borne out by consistently lofty ratings, although others would argue that they merely flatter to deceive. Earlier this year, analysts at Goldman Sachs forecast a healthy annual sales growth rate of 16 per cent over the next two years, but even the house broker was forced to cut its price target by around a third subsequent to the warning on margins.
Although the group has been able to drive top-line growth, transferring that growth into earnings has proved to be far more elusive. That's partly because the business model, a mixture of warehousing, logistics and digital functions, necessitated a substantial ongoing capital commitment, which fed through into margin compression. That was to be expected, at least for a time. But the required level of that commitment in a virgin market, both in terms of scale and duration, can be fiendishly difficult to quantify, particularly for a business with as many moving parts as Ocado. This also presents a dilemma in terms of ascribing valuations - or at least meaningful ones. The dot-com bubble, for instance, was characterised by extreme profligacy on the part of start-ups, exacerbated by analyst valuations that, if not exactly arbitrary in nature, often relied rather too heavily on supposition.
Ocado's experience raises the question: do the potential pitfalls of early-stage entry to a given market outweigh the advantages? Theoretically, early entrants can establish strong brand recognition, get a tight grip on the supply chain, while raising the barriers to entry through robust IP protection. Consumers or end users can often face prohibitive costs in switching their business to a later entrant, which means that the marketing imperative (and consequent capital outlay) for first-movers isn't as intense for businesses that enter the fray afterwards. However, it could be argued that first-mover status, by definition, negates the opportunity to learn from the mistakes and successes of predecessors in a market; companies riding on the slipstream of pioneers can frequently adopt novel, and more efficient processes and technologies. That, alone, could have a marked effect on where a company ends up on the industry cost curve over the long haul.
Indeed, the details of a wide-ranging academic study published in the Harvard Business Review at the time of the dot-com crash showed that while first-movers in both consumer goods and industrial markets gained significant sales advantages, they incurred even larger cost disadvantages over time. The study's authors concluded that in the early years of a new market, the first-mover's revenue benefit outweighed the cost penalty, but as the years passed, brand and marketing advantages faded while the cost penalty persisted, which "steadily eroded the profit edge". According to the study, on average, the initial first-mover profit advantage turned to a disadvantage after 10 years for consumer businesses and 12 years for industrial businesses.
Whether this fits into the Ocado narrative is open to debate, although we can say that the competitive advantages the group accrued through being first through the door hasn't deterred the likes of Amazon from muscling in afterwards. The concept of first-mover advantage was trotted out to justify some staggering valuations at the time of the dot-com boom, but could it be that a company that's 'one out, one back' - to borrow a horseracing term - is ideally placed in a virgin market? After all, Microsoft Corp didn't actually develop the first desktop operating system, but bought the rights to a system made by a rival Seattle software developer, and built MS-DOS on top of it to fulfil a time-critical supply agreement with IBM. The rest, as they say, is history.
