Let’s back up a bit: The other night I went to Sainsbury’s to buy a Prawn Makhani, possibly one of the most delicious objects on earth. I stood in line at the checkout for what seemed like ages and was then semi-forced by a staffer to use one of its automated self-service tills. I made the mistake of also buying a bottle of beer, which required an assistant to verify my age — buying beer is treated like a food-crime if you do it at the self-checkout. Of course the register took several goes before it properly recognised the two items I was trying to buy. (I’ve accidentally “stolen” things at Sainsbury’s before because those self-checkouts are so imprecise.)
The experience took longer than using a human at the old-fashioned checkout.
It was infuriating. There has to be a better way, I thought.
And there is: Ocado.
Punch in what you want on your phone and a day or so later a nice man or woman drops it off at your house. Ocado has transformed the 1 hour chore that was a trip to Sainsbury’s into a 10 minute task that I barely have to think about.
That’s why I think Ocado is going to win its long war against the supermarket business.
Usually, journalists are forbidden from investing in the companies they write about because it might make them biased. It’s a good rule. At Business Insider we have a more liberal policy, merely requiring transparency and disclosure. (You can see my permanent conflict of interest disclosure here.)
More broadly, I found that owning stock made me more sensitive to news about the companies and what was going on inside them. (I previously bought and then sold Facebook and Google, and I still hold shares of Twitter.) It made my understanding of them much more acute. I don’t think it made my coverage of those companies more positive or fluffy. Quite the opposite — you can get pretty angry, and attentive, when a company makes a mistake that costs you money.
Nonetheless, I have been criticised for doing this in the past, and you can read one of those critiques here.
The rap against Ocado is that it has never shown a profit. The company surprised everyone by blowing a hole in that myth on its last earnings call — it showed a profit for 2014.
That profit, however, is irrelevant. Ocado is a revenues growth story, it’s not an earnings per share company. It’s basically the Amazon of food in the UK. Ever year, every quarter, it piles on the revenues — and shareholders just seem to shrug with indifference.
In the future, I expect CEO Tim Steiner to pour every penny of Ocado’s sales back into the further expansion of the company. That will likely yield more growing revenues and tiny profits. More importantly, it will further degrade the market share of its bigger high street supermarket rivals and, my theory is, investors will finally figure out that Ocado is a better bet on the future, than Tesco is.
In other words, if you think Amazon was a good investment, then you ought to think Ocado is a good investment. That is my bet. I am holding Ocado for a long period.
Ocado’s stock has seen some ups and down recently. It once hit a high of 600p but is now floating around 350p. Investors don’t seem to know what to do with it. Here are two highlights from recent analyst reports. Note they have diametrically opposed views of where Ocado is going:
Bank of America (Sherri Malek et al.): “… Ocado’s proprietary online grocery solution will remain the most attractive for retailers globally, as the alternatives pale in comparison. Its superior economics could ultimately make its offering cheaper than traditional formats, which would revolutionise the grocery sector.”
Deutsche Bank (Niamh McSherry et al.): “Our Sell recommendation reflects the profitability we think is achievable for both Ocado’s retail business and more importantly for its licensing business. Specifically, we expect a declining order size to off-set potential improvements in delivery costs, limiting the margin upside. “
Clearly, I believe that BAML’s Malek has got this right and Deutsche’s McSherry will be proven wrong. Profits are irrelevant at Ocado — it’s all about growth.
Here are the reasons I think Ocado has so much growth ahead of it:
- Ocado doesn’t even cover the entire UK yet: Ocado currently only has two massive “customer fulfilment centres” open right now. It is building a third (Andover) and has plans for a fourth (Bexley). Ocado is basically a South of England phenomenon at the moment. Ocado hasn’t really started on much of the North of England, Wales or Scotland yet. That is a lot of unrealised growth.
- Ocado can expand internationally: The company hasn’t started talking about the rest of Europe.
- It’s a platform, not a supermarket: Ocado’s app is currently used for grocery shopping. The underlying tech can be used for any kind of buying experience. Any non-competing supermarket that wanted to add a delivery business could licence the Ocado tech. And any company that wanted to do non-grocery shopping could licence the Ocado tech. The possibilities are endless.
- Ocado is one of the UK’s biggest under-sung tech companies: It employs about 550 people in tech, up from 400 the year prior. Because it delivers milk and beer, people don’t seem to regard it as a tech company. But if its tech staff were a standalone company, people in the tech world would be raving about its size and success.
- Ocado has a spookily effective corporate culture: I have surreptitiously grilled my Ocado delivery drivers for info on the company for the last few months. They all love it. Every experience I’ve had with Ocado has been super-polite, and super-efficient. This seems to be a company that is dedicated to nailing it, every day, in a way that Sainsbury’s just isn’t doing.
- I can’t find anyone who complains about Ocado: Every time I meet someone who also uses Ocado I ask them if they have ever dropped the service. I have yet to find a “post-Ocado” customer.
- Ocado might get acquired: CFO Duncan Tatton-Brown says the company isn’t for sale. But never say never!
There are some obvious downsides:
Firstly, the market is clearly reaching some sort of peak and is due for a correction or pullback. I intend to own Ocado for a long time so I am expecting shares to go down further in the short-term.
Secondly, the last couple of times I bought stock and wrote about it — Facebook and Twitter — both companies’ shares responded by taking immediate nosedives.
So there you have it. I have put my money where my mouth is. It will be interesting to see if Mr. Steiner justifies my faith.
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