The ten-year extension to Ocado’s supply deal with Waitrose, announced earlier this morning (26 May), goes some way to laying the groundwork for the online grocer’s planned IPO. However, Ocado may have to do more to convince potential investors of its growth potential if it is to fetch top-dollar. Katy Humphries reports.
Ocado and Waitrose announced this morning (26 May) that they have agreed to extend their supply and distribution agreement for another ten years, until September 2020.
Under the deal, Ocado will retain the right to sell Waitrose products – as it has since 2002 – and can continue to use the Waitrose logo on its website and fleet of delivery vans.
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The timing of the announcement is significant, as Ocado has indicated that it is currently assessing market conditions with a view to floating the business this summer.
It is understood that Ocado hopes to raise in the region of GBP160m (US$229.9m) through the flotation.
While Ocado’s existing contract with Waitrose was not up for review until 2014, the news seems designed to assuage market concerns over the upmarket retailer’s commitment to Ocado.
The relationship between the two groups was thrown into question earlier this year, when it emerged that Waitrose was investing in the establishment of its own online delivery service, Waitrose Direct.
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By GlobalDataWaitrose has since confirmed that it is planning a “significant” level of investment in the business over the next two years in order to drive online growth.
Nevertheless, a spokesperson for Ocado insisted today that the deal extension indicated that both companies intend to continue driving “market-leading growth” through their “highly complementary relationship”.
“This new agreement enables both sides to continue to grow and benefit from the relationship. In areas where Waitrose and Ocado trade together, we have both grown significantly ahead of our competition,” Ocado CEO Tim Steiner said, commenting on the deal.
The partnership between the groups is mutually beneficial as Ocado shoppers are then more likely to turn to Waitrose for their “top up” shopping needs, Ocado claimed.
According to Verdict Research analyst Neil Saunders, the announcement will go some way to helping Ocado achieve their targeted valuation when the company floats on the London stock exchange in the coming months.
However, sounding a note of caution, he warned that questions remain over how Ocado will drive profitable growth.
“Ocado will still need to demonstrate to potential investors that they can drive growth through the business, which I think will be a tough, but not impossible, sell,” Saunders said.
In March, Ocado delivered a 25% jump in full-year revenue. However, while the company was able to reduce its operating losses from GBP21.6m to GBP14.4m, Ocado is yet to turn a profit.
Although Ocado declined to show its hand and detail its growth strategy today, there are clearly some areas that the company will look to develop in order to deliver a significant lift in volumes.
Expanding its presence geographically – particularly in areas outside of London – presents one of the most significant opportunities for the group going forward and Ocado could also look to increase awareness of its brand by increasing advertising and marketing.
As it invests in growing sales, Ocado will simultaneously need to plough money into developing its back-end support functions.
Indeed, the recent confirmation that Ocado is planning to establish a new distribution centre certainly suggests that the company is planning a major capital investment in developing its infrastructure.
While the specifics of this investment are yet to be revealed, reports have suggested that Ocado is planning to shell out around GBP100m in expanding its distribution base – meaning that the cash generated by the IPO will have a significant impact on the retailer’s ability to fund growth.
As Ocado looks to the future, it is clear that the impending IPO will play a significant role in its ability to invest and expand, while the success of the planned floatation hinges on the group’s ability to convince investors of its growth prospects.
Today’s backing from Waitrose is a significant step towards that goal. However, Ocado will also need to lay out a strong growth strategy if it is to secure the backing it requires.
