The supermarket price war has not been kind to Ocado’s shareholders.
After peaking at 617p at the end of February, shares in the online grocer have tumbled to 371.2p as of yesterday afternoon and they are down another 4.6% following today’s half-year results.
Investor fears are easy to understand. Ocado has tied itself to Tesco’s prices through its Low Price Promise and so a material change to Tesco’s pricing could eat into Ocado’s slender margins. Analysts have also speculated that Tesco’s recent introduction of £1 delivery charges could be damaging.
Today’s results certainly contained some bad news. Ocado grew sales 18% in the first quarter, but today it reported that growth for the half-year had slowed to 15.6% reflecting lower industry growth generally.
However, there were some important positives. Ocado revealed that it had secured a site to build a new customer fulfilment centre in Andover, Hampshire, that will be smaller than its two existing warehouses.
The so-called modular design of the new style CFC has a number of advantages. The most straightforward is cost. Ocado CEO Tim Steiner told The Grocer this afternoon it would provide more than a third of the capacity of its last CFC in Dordon, Warwickshire, at less than a third of the cost.
But perhaps more importantly, the modular CFC will be easier and faster to deploy. It will therefore be much more manageable from a cash flow perspective.
Some leading analysts are impressed. Redburn said in an investor note in May: “The design should create more value for shareholders than the traditional model due to 1) The reduction in the delay between initial capex and revenues, 2) the smoother capex profile 3) an alleviation of balance sheet constraint on new capacity and sales growth for Ocado group.”
And JP Morgan has hailed it as next key catalyst for Ocado. It said in a note last month: “We also believe the new concept will be quicker to deploy, cheaper to build, will occupy less space and might be more cost efficient.”
The analysts said the new modular design should also increase demand from international retailers to partner with Ocado.
A year on from Ocado’s Morrisons deal, there has been no news of any potential partnerships. For now, this is not an issue. Ocado has been busy delivering the Morrisons deal and is now working to re-platform all its IT into cloud-based technologies.
Once this work is complete and CFC 3 has been built, international deals are more likely to happen. If they don’t, questions will be asked.
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