Ocado makes £1bn bet that online grocery shopping is here to stay

Ocado is gambling £1bn on a drastic change in shopping habits as online grocery sales take off in the wake of the coronavirus crisis.

The firm is launching a major fundraising bid to rapidly expand both its own internet sales operation and the production of robot factories for supermarkets worldwide to capitalise on surging demand for home deliveries.

Chief executive Tim Steiner believes that many shoppers forced to buy food over the web during lockdown will now permanently stay away from physical stores - giving his firm a golden opportunity to dominate the market as grocers adapt.

He is scrambling to grow Ocado more quickly than first planned as a result, and is seeking to raise cash from investors through a £650m share placing and a £350m convertible bond offer.

Mr Steiner, who co-founded the company two decades ago and has overseen a fivefold rise in its share price in the past five years, said the current crisis will significantly change the way people shop worldwide.

He said: “The significant acceleration in online grocery provides us with greater opportunities than ever before."

The fundraising comes just over a year after Ocado agreed a £750m deal to sell half of its retail business to Marks & Spencer, which currently does not offer food online. The online grocer is worth almost £15bn, while M&S is valued at just £2bn despite having almost 1,500 stores in 57 countries.

Ocado's return to the market for more cash comes after it slumped to pre-tax losses of £214.5m last year.

Clive Black, a retail analyst, said: “Ocado is not scared to raise money.

“At some point it will have to deliver a financial performance, but for now it is in a sweet spot and it’s taking advantage of it. It has a following.”

Mr Black agreed with Mr Steiner’s forecast that the high demand for online grocery will continue as shoppers break with old habits. In April, research showed that the UK's online grocery market is expected to grow by a third in 2020 to reach £16.8bn.

However, Mr Black pointed out that Ocado was overwhelmed by shoppers flocking to its website as the nation went into lockdown - to the extent it was forced to shut its website for an overhaul that lasted several days.

Ocado had neither the warehouse capacity nor drivers initially to keep up with demand, and was also hindered by a fire last year which took out one of its main depots in Andover, Hampshire.

The company's traditional rivals and mainstream grocers were also overwhelmed but managed to double their capacity by having more pickers in stores, which is easier to manage short-term.

Online sales are still only a fraction of the grocery market overall, meaning there was little physical capacity to deal with the spike in orders during coronavirus.

Although Ocado is best known by the public for selling groceries on its website, it has staked its future on a technology business, which helps other supermarkets sell online.

Mr Steiner plans to use the cash to grow Ocado’s website and build its robotic warehouses for product-picking quicker. It currently has seven international deals with chains including Kroger in America and Casino in France, plus Morrisons in the UK.

Ocado gets some upfront fees as depots are being built, but the rest of the fees is linked to sales and capacity once the fulfilment centres are built.

It hopes to win new business on the back of the cash injection. The firm worked with Goldman Sachs and JP Morgan Cazenove on the fundraise.

Source: The Telegraph