Percy’s Become Profitable: Ocado is now the UK’s Most Valuable Food Retailer

October 11, 2020

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What's going on here?

The online delivery group briefly became the UK’s most valuable food retailer last week with a value of £21.7bn, overtaking long-time behemoth Tesco’s.

What does this mean?

Two years ago, Ocado shares were hardly sought after. However, it has progressively attracted more customers due to its efficiency and willingness to embrace modern technology. With the coronavirus pandemic prompting people to try online shopping for the first time, Ocado share prices have soared. 

This resulted in  Ocado briefly overtaking its rival, Tesco, as the most valuable food retailer in the UK. However, its valuation of £21.7bn did not last and a 5% slump in share prices brought Ocado’s market value down to £20.5bn. Although classed as a food retailer, investors view Ocado as technology stock. This is because the company is building over 50 automated order-picking warehouses globally. When comparing Ocado shares to that of the tech “disrupters” of other industries like Netflix and Tesla, its stock has increased 630% since 2018 by comparison with 150% and 575% respectively. This demonstrates Ocado has the potential to grow as investors are willing to pay a premium for companies with growth prospects.

What's the big picture effect?

Earlier this year Ocado switched from delivering for Waitrose to delivering for Marks & Spencer’s in a £750m deal (see more on that here).  So far it seems that the likes of Colin the Caterpillar and Percy Pigs are proving lucrative. This is a huge turnaround for a company that a former Tesco CEO described as a “charity” because of its losses. 

However, Ocado faces some tough competition. For one there is Tesco’s, the biggest UK retailer. Tesco is still bigger than Ocado in terms of sales, profits, cash flow and dividends. Tesco’s dividends last year were nearly worth as much as a decade of Ocado’s operating cash flow. Then there is Amazon which has partnered with Morrison’s to offer free online grocery deliveries (see more on that here). Finally, there is fierce competition from its old partner, Waitrose, which has seen its weekly orders grow to 190,000, a 20% increase since its split from Ocado. 

Ocado has one advantage, its technology, which provides retailers with the infrastructure and software to compete with the likes of Amazon: it is this that attracts investors. Many predict that it will not be long before Ocado could be worth as much as Tesco’s, Sainsbury’s and Morrisons put together. Ocado holds promise but whether it will deliver for investors is another question. As with many sectors, the company’s potential rests on the actions of Amazon. The global giant could at any moment decide to strike the sector with technological innovation and undercut all of its rivals. For example, Amazon already offers free delivery, an operating cost few other companies can afford. Until Amazon strikes again, it seems Ocado might be in the clear.

Report written by Michael Johnson

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