Ocado and Horsehair
Congratulations to the three founders of Ocado, the online grocery delivery business, who last week managed to get their company listed onto the London exchange (with a helping hand from their former employer Goldman Sachs). The shares listed at 180 pence and have since fallen to a low of 155 pence before closing at 167 pence today.
In the process Ocado raised £200 mln of fresh money which will help to keep the company afloat until the day arrives when it actually reports a profit (a feat it has not yet managed in its entire 10-year corporate life to date). Ocado’s Unique Selling Point is that it delivers Waitrose groceries (and whilst these may be “honestly priced”, we all know that Waitrose is one of the most expensive supermarkets in England; in fact how Waitrose gets away with its high prices deserves a whole separate essay – deterring the riff-raff shopping under-class undoubtedly helps to create a more pleasant shopping experience for its well-heeled customers). Ocado hoped to avoid the fate of Webvan by using the higher profit margins on Waitrose products to pay for the cost of pickers, drivers & vans. The hope is that if Ocado can grow its sales further then eventually it will make a profit.
The pension fund of the John Lewis Partnership still owns 10.36% of Ocado (down from 26.44% pre-IPO). JLP were a backer of Ocado from the outset and went through several funding rounds with Ocado and are now looking to exit, having injected their OCDO stake into the JLP pension fund in November 2008 to help with an underfunding situation. At this point in time, JLP have a vested interest in seeing Ocado do well for just long enough to allow their pension fund to sell the remainder of their stake.
Beware the day when the JLP pension fund sells its remaining stake in Ocado. This will fire the starting gun on the race for Waitrose to ramp up its own online delivery service. The next likely step will be for Waitrose to stop supplying Ocado with its grocery products, which will leave Ocado hung out to dry without a USP. The earliest JLP can terminate the Sourcing Agreement is March 2017, although Waitrose is allowed to start competing against Ocado to deliver groceries to customers located inside the M25 from next year. The M25 undoubtedly encircles the area of the UK with the highest density of well-heeled shoppers and it is no coincidence that Ocado located its first warehouse at Hatfield, close to the M25, so as to service its target marketplace.
The Ocado IPO reminds me of the Partygaming IPO. Both stocks have the Sword of Damocles hanging over them. The difference is Partygaming were generating vast amounts of cash from US gamblers before the States finally passed legislation outlawing online gambling (and PRTY shares collapsed). Ocado is not making a profit and the day will come when JLP cuts that single strand of horsehair.
11 Feb 2011. Post-Script: The JLP Pension Fund sold its entire remaining 10.36% stake on Ocado at 265 pence (trade executed by Goldman Sachs).
Tags: Damocles, goldman sachs, horsehair, JLP, John Lewis, Ocado, OCDO, Partygaming, pension fund, PRTY, Sword, USP, Waitrose, Webvan
August 1st, 2010 at 4:49 am
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