Sunday, 11 October 2020

Ocado - Portfolio Addition


Established in 2000 and floated on the market in 2010, Ocado has grown very rapidly to become a member of the FTSE 100 with a current market cap. of £18bn. They are transforming the world of grocery shopping in the UK and are now looking at expanding their technical know-how into a global market and into other wider sectors. Unlike the traditional supermarkets like Tesco or Sainsbury, Ocado has no physical stores but operates only online and does all home deliveries from a small number of customer fulfilment centres.

The business has grown rapidly in recent years as we move to more online shopping and of course the Covid-19 pandemic with periods of lockdown has boosted demand for even more online services. As a result, it  is looking like 2020 will be a breakthrough year when the company delivers its first annual profits. In a recent trading statement, the company announced an increase in revenues of 52% for the 3rd quarter to end August and expects full year profits of  at least £40m.

In 2019 Ocado stuck a deal with M&S to set up a joint retail operation which provides M&S with its first home delivery service. M&S have bought a 50% share of Ocado's retail business for £750m. Ocado customers can now access over 4,000 M&S lines as well as Ocado continuing with their own-label products. The deal with Waitrose has now ended. Ocado also has a deal with Morrison supermarket providing the technology for its online home deliveries. It will be interesting to see if Ocado customers who used the service mainly for Waitrose products are prepared to go along with this new offering...the switch took place this September so early days.

Technology

Whilst its main area of focus is retail, in essence, Ocado is a cutting edge tech company. Ocado Technology designs most of the in-house operation. The whole operation is highly automated - warehouse, app, deliveries, routing and customer service - everything is based on sophisticated algorithms and smart optimisation.



The Ocado Smart Platform is the world's most advanced filfilment and logistics platform. This technology has been developed in-house over many years and is protected from competition by over 200 worldwide patents. This should provide barriers to entry by potential competitors - the proverbial moat.

The warehouses feature thousands of robots swarming like bees across a huge grid. They can pick a 50-item order in minutes whizzing around thousands of bins at speeds of up to 20mph!

Expansion

This smart platform can be licensed to other operators around the globe which means these automated efficient warehouses can be set up in every country. Some other applications include baggage handling, parcel sorting, vertical farming, container ports etc. UK grocery retail is just the start of the journey.

The company is now rolling out International Solutions which secured fees of £73.7m in the first half of this year, an increase of 58%. In addition to the tie-up with M&S and Morrisons in the UK, Ocado is now working closely with Casino of France and Sobeys in Canada. Also Bon Preu in Spain, Coles of Australia, Aeon in Japan and Kroger in the US.  

It will be interesting to see where expansion and development goes from here.

Isuzus EV Delivery Van


On the environment, the company say greenhouse gas emissions are an area they are looking to improve along with food waste and plastic recycling. They are currently looking at the switch to EVs for deliveries which account for around 70% of the company's carbon emissions. Trials of the EV delivery vans started last year and this year the company are committed to move their North London fleet of vans to fully electric. I will be interested to hear more on this in the full-year results.

Now Close to Overtaking Tesco


The shares have had an excellent run this year moving from £12.50 at the start of 2020 and reaching a high point of £29 at the end of September before falling back over the past week or so. The shares were recently added to my ISA at the price of £23.65 and I will be looking to add on any significant pull-back from here. There may well be some share price volatility over the coming weeks and months as Covid-19 plays out. The share price has doubled this year to-date and I think the longer term prospects look very promising and I would not be surprised to see the shares hit £50 and beyond over the next year or two. There has been speculation they may become a target for a takeover by Amazon...

The next Q4 trading statement will be in December and the full year results are in February.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in individual companies can be rewarding but is higher risk compared to collective investments - always DYOR!

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