Top marks for its customer service, but profitability is another matter, says Clive Black

The quoted London food retailing segment could soon have a new member Ocado.

A big advisory team has been assembled, raising an eyebrow or two in financial circles for such a small company. Ocado is a business that creates debate in the retail world so what do we think?

Ocado is a remarkable achievement, especially for ex-investment bankers. Its Hatfield HQ is a place of incredible learning, where painstaking detail has created a business with outstanding service to customers.

I should know, I am one. That service brings the Waitrose proposition to the door in colour-coded bags with add-ons that aren't easy to get hold of, including the vaunted H Forman & Son black cod.

The e-communication is sharp and persistent; Ocado likes to keep in touch with its punters, so much so that it has suggested customers may become shareholders. Whether it is appropriate to communicate a financial product in this way remains to be seen.

High marks for customer service, then, but is Ocado a good business?

It is impossible to answer that question properly because we don't yet have the flotation prospectus. But we have doubts, and central to our concern is Ocado's lack of profit after a decade trading.

Few internet retailers make money and, of those who do, most sell up. Last year before depreciation, financing costs and tax Ocado made £9m on about £400m in sales.

Building margins will be essential to Ocado's investment story. However, we're not sure that management will be able to comfort us enough to justify a high equity valuation now for profits years down the line. It could take an awfully long time for satisfactory margins to emerge, especially if a second Hatfield is built further north.

Ocado is not a mass-market retailer, being largely a Waitrose distributor. Should that relationship merit a premium or discount equity rating? To our minds, an own-label distributor is a discount matter, a dependency feature something outside Ocado's control.

Then there's pricing: Ocado is expensive. It may have elements of Tesco pricing on brands but it doesn't have Clubcard, Tesco promotions or sub-brand prices (Value, Finest, etc). Ocado may also become regarded as a 'pricey' player.

So, while Ocado is good for customers, we need some convincing that it is a good investment.

Dr Clive Black is head of research at Shore Capital Stockbrokers.