When Ocado came to market in 2010 its IPO was greeted with much scepticism, including my own. Here was a company whose decade-long attempt to disrupt the UK’s grocery market had gobbled up £300m in venture capital financing, but which at that point had translated into less than a percentage point of market share without a penny of pre-tax profit to show for it. Its CFCs – massively automated ‘customer fulfilment centres’ – looked hugely impressive, but were also hugely expensive; rivals such as Tesco and Sainsbury’s could do the same, but with a far more rudimentary solution: human beings. Ocado claimed that the knowhow it had developed in robotic food picking could be sold to other grocers looking to expand online, but for years we saw few signs of any actual buyers.
And as those buyers failed to materialise, that bearishness seemed well founded – after a post-IPO bounce the shine soon came off the story and the shares began to flounder. A rally into 2014 was also followed by a near-four-year period in which the shares traded ever lower. But in the past six months the bears have been bitten, with the share price more than doubling since December after news of big international partnership deals, as the company had promised years earlier, and a broader belief that automation is finally coming of age.
So was I wrong about Ocado? On the face of today’s share price, yes – even if I was not wrong for the first two-and-a-half years of its public life. And in fact analysts remain divided on Ocado’s prospects. Those that look at it as a retailer remain convinced that its model hasn’t proved itself – its UK market share is still just 1.2 per cent, up from 0.9 per cent at the end of 2014. Over the same period, discounters Aldi and Lidl have increased their share from a combined 8.5 per cent to 12.8 per cent, together bigger than Morrisons and with the most low-tech of propositions.
But fans of Ocado suggest this is looking at the company in the wrong way – instead, they say, we should view it as a technology company rather than a grocer, and that recent deals prove that it could indeed fulfil its promise as “the Microsoft of grocery retail”. I still have my doubts, as do more traditional grocery analysts, who point out that it’s still not clear how technology deals – which unlike software companies require massive investment in each customer – will turn into profits. Indeed, throughout its history Ocado has often been big on ambition and scant on such important detail, and that’s why I believe its shares remain as much of a leap into the unknown as ever.
