A reality check for Ocado

So Christmas came and the tills rang merrily for many retailers.

Successful seasonal trading makes more likely a round of corporate action as fears over performance are put to rest, and a raft of retailers may opt for IPOs.

Among them is Ocado, the online food retailer, which enjoyed a record Christmas. Ocado has drawn plenty of glowing press comment and there’s plenty to admire in it, but whether it is flotable is another matter.

Ocado, which turns over more than £500m annually, rang up sales of almost £41m in the four weeks to December 26 - a like-for-like leap of 30%. That’s testament to its entrepreneurial verve, but needs to be contextualised. Asda’s top 12 stores, for example, generated sales of more than £4m each in the seven days to Christmas, so between them they beat Ocado’s monthly total in just one week.

That’s a reality check on Ocado’s present scale. Given the established position and scale of the big grocers, how deep an inroad can Ocado make in future?

Its advocates, however, see Ocado’s scalability - along with cutting-edge technology, efficiency and service standards - as among its strongest characteristics and a firm foundation for growth.

But Ocado, while a trailblazer, hardly has the online food sub-sector to itself. Asda, Sainsbury’s and Tesco are all powerful and growing. At the interim stage, Tesco etail sales hit £1bn and profits £58m. For Ocado to float, investors must be convinced its model is a future winner, providing significant advantage over Tesco.

While in the black EBITDA-wise, Ocado is not profitable at the pre-tax level. The etailer is almost 10 years old and given the circumstances, has some way to go to convince many investors why now is the right time for an IPO and what exactly it would return to shareholders in the years to come.

Etail is growing, but a rising tide carries all boats. While the good ship Ocado may be part of the flotilla, it still has some convincing to do if it hopes to float on the stock market in the foreseeable future.