Ocado, or Ocadon’t?

Had a very interesting day in Nottingham at Boots on Friday, but will save that for my next post and instead concentrate on the weekend’s big story, the news that Ocado has appointed advisers ahead of a possible float.

Ocado has long been the darling of the business sections, I think at least in part because they’re written by the type of people who love shopping with Ocado. And from a customer point of view, it is without question a brilliant business. Its customer service is first class, it achieves levels of accuracy with its orders that put its rivals in the shade, and its warehouse in Hatfield is a model of technical innovation.

The other side of the argument is that the fact it provides such great service is no reflection of whether it’s a good business to invest in, and there’s no skirting around that while it is profitable in terms of EBITDA it has never made a pre-tax profit. That’s not unusual among dotcom business but Ocado is ten years old and it’s a big ask of institutions to invest in a business which has never actually made a profit.

The three former Goldman Sachs bankers who set up Ocado don’t like this being pointed out and went bananas with us ahead of a perfectly reasonable comment piece by George which we published last month, even though they didn’t actually know what it was going to say. God knows how they’ll have reacted yesterday, particularly to the coverage in the Sunday Times which took a pretty sceptical tone.

The founders say Amazon didn’t make a profit for years either but the two businesses are very different, and the big worry with Ocado is its reliance on Waitrose. Metropolitan yummy mummies shop with Ocado not just because its service is good but it sells Waitrose groceries. But Waitrose is expanding its own Waitrose Deliver service, which is also very good, and who’s to say at the end of its current contract it won’t simply want to start delivering from its London stores itself, particularly as everyone says the cultures of the two organisations are slightly at odds, to put it politely.

Now Waitrose retains a corporate tie with the company because the John Lewis Pension Fund owns a 30% stake in the business, but it could quite conceivably sell this down over time. And because Waitrose products are so core to what Ocado is all about, this adds another element of risk for potential investors. None of this makes Ocado a bad business, and it could quite conceivably be a highly profitable success in time. But, as with any float, there are no guarantees.