Here was a deal to build 20 automated warehouses and crack America’s $1 trillion food delivery market: a proper showcase for Ocado’s whizzy “solutions” business. No question Kroger is in a different league to the tie-ups with France’s Groupe Casino, Canada’s Sobeys and Sweden’s ICA. Indeed, when the deal was unveiled last May Ocado shares jumped 44 per cent to 797¼p, since when they’ve risen to £10.34 — up 4 per cent yesterday and valuing the group at more than £7 billion
Even so, you have to wonder. The test bed for the Ocado tech is Britain, where Mr Steiner’s been at it for 18 years, blocking the streets with his delightful vans as well as delivering for the likes of Waitrose and Morrisons. And he’s still only got 721,000 active customers, generating £1.48 billion retail sales and £82.5 million ebitda. True, shoppers increased 11.8 per cent last year in a grocery market growing at just 2 per cent or so. But there are 27 million UK households, few using Ocado.
Where’s the proof food delivery makes real money? Of course, Mr Steiner wants Ocado valued as a technology outfit. But the solutions wing chipped in minus £17.9 million ebitda last year on just £123 million sales. The overseas warehouses still have to be built. And, thanks to new IFRS 15 accounting rules, correctly preventing Ocado from recognising revenue from new sites until they are up and running, near-term losses are going up.
Ocado must absorb £350 million capex costs this year alone. And then there’s a risk things go wrong, driven home by yesterday’s fire at the Andover distribution centre. Say Mr Steiner’s team of AI-driven robot pickers become so clever they go on strike. Or contain a rogue arsonist? Or say the sites simply don’t work as well as he, or Kroger, hopes.
In short, Ocado’s a long way from demonstrating that it will ever be a money-spinner. Yet, it’s being valued at 4.5 times sales: a premium to Amazon on 3.4 times. And Amazon made $10 billion net profits last year. As valuations go, Ocado’s looks to be biting off more than it can chew.
A Brexit issue?
That’s Brexit for you. Have you seen the PMI surveys? Now the services sector’s poleaxed — a January reading of just 50.1 for the businesses that power four fifths of the UK economy. Or just 0.1 above total stagnation. Employment in the sector is also down for the first time since December 2012.
The key reason? “Political uncertainty”, of course, with “Brexit-related concerns” hitting client demand and leading to “more cautious spending”. Add in similar news from the manufacturing and construction sectors and IHS Markit economist Chris Williamson reckons “the last three months have seen the economy slip into its weakest growth spell for six years”. Meantime, Duncan Brock from the survey’s joint compiler CIPS, notes how “the vice-like grip of Brexit is now taking hold”. Scary stuff.
So, if only Britain was staying in the EU. Just think of the economic nirvana over there, where the composite PMI for the eurozone, spanning all three sectors, has just crashed to “its lowest level for five and a half years”. Yes, Brexit jitters might not have helped over there, either, but neither have trade wars, gilet jaunes or political infighting.
Indeed, could it be that there’s a wider European slowdown going on — rather than just some UK affair induced by Brexit, which admittedly hasn’t helped? Samuel Tombs of Pantheon Macroeconomics makes a key point, too: that “the PMIs tend to overstate political uncertainty”, with the rate of GDP growth implied by the PMIs since 2004 “wide of the mark by an average of 0.3 percentage points”. Things may not be quite so gloomy, anyway.
Bank’s battle
Buying a 5.5 per cent stake in Barclays doesn’t give you a right to a board seat. So the bank would be setting a dangerous precedent if it bows to the May AGM demands of Edward Bramson, the activist investor from Sherborne — not least when he’s pushing a diametrically opposed strategy to that of the lender’s boss, Jes Staley.
Despite his trappist tendencies, Mr Bramson has let it be known that he fancies dismantling Barclays investment bank: the one Mr Staley had to put back together after an internal assault by his predecessor Antony Jenkins. True, returns need improving. But continual handbrake turns on the strategy front don’t help. And in any slowdown hitting the retail bank, the investment bank brings counter-cyclical benefits.
Besides, this isn’t an Electra Private Equity situation where Mr Bramson owned 28 per cent. Here is a proxy fight Barclays should win.
