The Max Attacks: Will Ocado EVER bear fruit?

It’s never turned a profit, and it’s lost 40 per cent of its flotation value. What hope is there for the online grocer?

Each month, we grant LBC Radio presenter James Max the power to fire the business management he’s least impressed by. Why has Ocado outraged him?

I don’t see the point of Ocado. At the vanguard of online supermarket activity, Ocado’s founders struck a deal with Waitrose to allow the sale of their goods online.

It was innovative because Waitrose hadn’t developed an online strategy. A solution, if that’s where you wanted to buy your groceries but couldn’t be bothered to physically go there. Fair enough, I get the idea.

The deal was textbook. Former Goldman Sachs investment bankers Tim Steiner, Jason Gissing and Jonathan Faiman set up the company in 2000.

Gradually it grew and with a string of illustrious backers it floated in 2010. For a company that has never made a profit that’s quite an achievement. Indeed I take my hat off to the rather audacious manner in which the company has been funded, grown and monetised for its original investors.

Ocado has lost nearly 40 per cent of its value since it floated and is about 60 per cent off its peak

Now it’s a public company, however, the game has changed. The gloves are off and it’s time to fire senior management.

But hang on a minute. Customers are happy, the technology works, turnover is up, they signed a new supply contract from Waitrose, investment is underway, the company has cash and isn’t over-leveraged.

Indeed in difficult economic times, the numbers are looking better. Have I gone mad? The simple answer to that is no.

The stock market flotation was a messy affair. Multiples were being applied to a company that hadn’t made a profit.

Analysts were not impressed with the business model. One went as far to say, “Ocado begins with an o, ends with an o and is worth zero”. Sir Terry Leahy, the former CEO of Tesco, once described the business as a “charity”. The alarm bells should be ringing.

After taking the company public at a reduced offer price of 180 pence a share, at the beginning of 2011 management must have done something right because the share price rose significantly. To 250 pence a share. Which is bizarre because the company was still making a loss. However, the John Lewis Pension fund wisely divested their 29 per cent stake in February 2011.

There’s no vision to turn a business that’s almost breaking even into one that actually makes money

It’s 2012 and the share price isn’t looking so healthy. Having just announced a £2.4m loss, which is an improvement on last year’s pre-tax loss of £12.2 million, investors seemingly aren’t impressed. It’s now at about 112 pence a share, which means the company has lost nearly 40 per cent of its value since it floated and is about 60 per cent off its peak.

Management are doing an effective job of managing what they have. It’s not that the site is bad. It isn’t. And the delivery service isn’t bad either. Many customers will tell tales of good service, a pleasurable online experience and timely deliveries.

Indeed there was quite a buzz over the summer for the choc-ice range, only available at Ocado.

My usual bugbear of bad advertising doesn’t apply either. Because they seem not to do much.

But the whole concept for the business is flawed.

The problems go right back to the core mission statement: “To revolutionise the way people shop forever, by giving them a uniquely innovative and greener alternative to grocery shopping”.

The core principals of “great value”, “great service”, “great choice” and “green way to shop” sound tired. They are.

The competition has caught up and I’ll let you into a secret. There’s nothing revolutionary about Ocado, its business model, website or customer service in my opinion.

Most consumers don’t really give a stuff about being “green” (unless it’s free) and all the major supermarkets have online stores that are just as good. Competitors are using their sites as an extension of their physical presence. And doing it better.

Ocado is a high volume, low margin business that has a heavy investment requirement. Yet without all those stores on the high street and out of town, surely their cost base is lower?

If you aren’t paying a dividend to your shareholders, how on earth can you accept a bonus?

Where are the cost savings going? If you look at the online prices, not to customers.

There’s no exclusivity with Waitrose who are now doing their own website which looks distinctly fresher and more lively than the Ocado offering. There’s very little that you can buy on the Ocado site that you can’t buy elsewhere.

The site is a bit old school and there aren’t many examples of goods being cheaper. Indeed one could argue that in these difficult economic times where saving time and good service is expected while competitive prices are the driver for growth, one has to wonder where Ocado is going.

There’s no vision to turn a business that’s almost breaking even into one that actually makes money.

One clue as to where the savings are going is into the pockets of the execs. While we don’t have this year’s remuneration figures yet, we do know that Tim Steiner, the chief executive, was paid a basic salary of £394,000 in 2010 and received an annual bonus of £220,000.

Indeed his non-executive chairman, the impressive Lord Grade, was paid a basic salary of £113,000 and received a bonus of £100,000 on floatation that he chose to take in shares.

If you aren’t paying a dividend to your shareholders, how on earth can you accept a bonus? And do you really need such expensive top management?

The founding partners and investors have considerable holdings in the company. Not only do they hold millions of shares personally, but they have even more stashed away in discretionary trusts. Even at today’s lacklustre prices the CEO has £32m of the things.

While they have a meaningful stake in the business, for the sake of investors it’s time for the existing management to realise that they were lucky. They got their idea away.

For investors to make any money at all a radical change of strategic direction is required. Eventually, the company needs to be sold to a competitor, or a private equity house.

For now, a radical shift to deliver competitive pricing and a wider offering is required. Meanwhile, the final two founding directors should follow Mr Fairman’s lead and say their goodbyes, because in Ocado’s current form, as a potential investor? I’m out.

James Max presents Weekend Breakfast every Saturday and Sunday mornings on London’s Biggest Conversation, LBC 97.3 FM. He is a qualified surveyor and worked in property and finance for 15 years. After working for one of the country’s leading property advisory firms, he completed healthy stints in investment banking and private equity, before becoming a candidate on The Apprentice, which launched a career in broadcast media. Visit JamesMax.co.uk.

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