Opinion: Investors right to climb aboard the Ocado bus

The online grocer had long been ploughing investment into its fulfilment technology for the benefit of its own UK grocery business, but would now make the strategic shift to begin licensing its wares to international partners.

Despite investing time, money and energy into the ambitious plans, Steiner’s self-imposed deadline for doing a maiden deal quickly came and went.

Questions were rightly raised over the legitimacy of Steiner’s global blueprint, as some onlookers began to doubt the true value of the Ocado stock.

But like London buses, two major international deals have suddenly come along in quick succession.

Monday morning’s revelation that Ocado had penned an agreement with 1,500-store Canadian grocer Sobeys came just two months after a similar partnership was struck with French player Casino.

And, again like London’s double deckers, everyone is now scrambling to board the Ocado bus.

“Ocado has transformed the market narrative completely over the past three months”

 

The etailer’s stock has increased almost 40% in value in the past three months alone, closing last week at 412.2p.

It rallied further on Monday morning, spiking another 13.5% in the first three hours of trading as investors sought to gobble up a slice of what looks an increasingly tasty pie.

You can understand why they would want to do so – Ocado has transformed the market narrative completely over the past three months.

It has flipped the question being asked from “will Ocado ever do an international deal?” to “how many international deals can Ocado do?”

The answer to the latter is seemingly limitless, as overseas markets catch up with the UK and migrate online.

“This is happening globally,” Ocado Solutions chief executive Luke Jensen tells Retail Week.

“Obviously we are focusing on the bigger markets, but it’s genuinely a global opportunity.

“We are looking across all markets for retail partners who share our ambition to build transformational grocery ecommerce businesses in their markets.”

Further deals

Canada alone represents a sizeable opportunity, when you consider the country boasts a grocery market worth £75bn annually.

Ocado is providing Sobeys with its full repertoire of technological and logistical expertise, including its front-end website functionality, mobile grocery ordering apps and its last-mile routing management technology.

That, in itself, suggests that the duo mean business.

Toronto, where Sobeys and Ocado will construct a state-of-the-art customer fulfilment centre during the course of the next two years, has a population of six million – similar to that of London, where Ocado has enjoyed sales success. 

For Goldman Sachs analyst Rob Joyce, the Sobeys deal therefore offers “further vindication of the attractiveness of the [Ocado Smart Platform] model” and the “efficacy of Ocado’s online delivery solution”.

Indeed, analysts at Exane suggest the potential for further deals – and therefore continued growth in the Ocado share price – is now more robust than ever.

“Though some might argue that Ocado’s share price captures the potential for future deals, we’re not so sure,” they suggest.

“For us, Ocado’s shares are driven much more by news flow than they are calculations of fair value.”

With the potential for more deals to create further share price spikes, investors are right to climb aboard the Ocado bus.