Ocado, the online grocer that resembles a food version of Amazon, has revenues of nearly £1 billion ($US1.5 billion) in Britain and could be just as success in the US through partnership deals, says Deutsche Bank.
The bank’s analysts Karen Short and Shane Higgins just dropped a research note that looks at how good things could be for Ocado if it launched in the US soon.
In fact, the level of detail about potential contracts in the US is so dense that it leaves us wondering if Ocado hasn’t already put the wheels in motion to set up shop abroad already. Or if a US partnership is about to be announced.
Ocado, unsurprisingly, declined to comment.
Ocado is one of Britain’s most exciting tech companies, as it’s racking up massive revenue growth and creating a whole heap of technology that it can hive off and sell on to other businesses should it wish.
Its revenues grew by 20% to nearly £1 billion ($US1.5 billion) in 2014, when it recorded a profit for the first time since it floated on the stock exchange five years ago. Its latest data shows that its group gross sales for the 12 weeks to February 22, soared 19% year-on-year. Ocado also said that average orders per week also rose by 18.1%.
Deutche Bank analysts say in the note that Ocado would make an attractive partner for a US-based food retailer. A likely deal would see the partner get access to Ocado’s Smart Platform (OSP), a smart bit of kit that manages everything from processing the order online to getting the groceries to the front door.
Here they detail why this could boost the growth of any prospective partner:
- First, Ocado would put up a large portion of the capital in exchange for a one-time set-up fee and a commitment of at least 3 years (which would include variable fees tied to sales).
- Second, Ocado would handle ongoing maintenance of the equipment (reducing ongoing labour and other expense).
- Third, Ocado would be responsible for integrating all systems and for software updates.
- Fourth, partnering with Ocado would provide a first-mover advantage, which is especially critical given that the market is likely to shift more towards online in the future.
At the moment, Deutsche Bank’s analysts say Ocado has around 12% share of the British grocery sector. Ocado has previously said several times to Business Insider and through trading updates and interviews that it plans to offer its technology and platform to international retailers to expand. Deutsche Bank said Ocado would generate cash from the fees or contract deals with international partners.
However, Deutsche Bank warned that it would be very unlikely that Ocado would be able to replicate the lucrative, exclusive deal it signed with British supermarket Morrisons.
Prior to Ocado’s deal with Morrisons in 2013, Morrisons had to pay Ocado a £30 million ($US46.2 million) in start-up fees and pay for half of the start-up capital, which was worth around £80 million ($US123.2 million). It pays Ocado around £12 million in royalties annually for Ocado’s service.
“Ocado’s 20-year agreement with Morrisons gives Morrisons exclusivity in the U.K., which was an acceptable opportunity cost (not being able to partner with anyone else in the UK) for Ocado given that Morrisons will pay Ocado a fee when the online business becomes profitable,” said the analysts.
“Looking to the U.S., Ocado does not plan to offer exclusivity, although the specifics of each contractual relationship will vary, as the company will be offering a very compelling price for the service. Once Ocado explains the rationale as to why they are not offering exclusivity, the retailer usually understands.”