As Ocado secures extra capital and time to progress its growth strategy, Retail Week asks what the deal means for the etailer’s much questioned future.
Controversial as ever, Ocado has secured what some say is a “lifeline”.
Led by chief executive Tim Steiner and aided by advisory group Ondra Partners, Ocado has secured time and money by extending a £100m capital expenditure facility by 18 months to July 2015 with existing lenders Barclays, HSBC and Lloyds as well maneuvering an additional £35.8m capital in a placing.
Ocado’s management, including recently appointed finance chief Duncan Tatton-Brown, will have breathed a sigh of relief in securing the deal after months of speculation that the company was likely to breach its banking covenants.
Tatton-Brown said today that the early extension of facilities will “ensure that Ocado has the continuing resources to focus on delivering growth through increasing the range and enhancing our customers’ shopping experience” as well as investing in marketing to new customers reached by its second distribution centre set to open early next year and to expand its non-food range.
However, the City is decidedly less positive. Shore Capital analyst Clive Black, who said it had been a question of “when, not if” today’s agreement was reached, doubted whether the placing would genuinely allow growth. “It’s not a placing for expansion, it’s a placing to keep the wolves from the door,” he said.
Black said that the company would easily raise the £35.8m from existing shareholders who believe in the much maligned business model. However, he questioned the etailer’s recent sales performance.
Ocado said total sales increased 11% over the 14 weeks to November 11 and were up 13.7% in the final six weeks of the period.
Black said: “We have questioned the robustness of the group’s business model since before its flotation and we continue to do so. In a nutshell, Ocado provides a service that a number of customers clearly value and appreciate. However, whilst the British online grocery expands ahead of the overall market, Ocado is losing market share as its competitors grow more rapidly; increasingly augmented by a growing click and collect capability that Ocado is not capable of competing with due to its absence of store base.”
Impassioned entrepreneur Steiner would doubtless respond that click and collect is a compromise brought about by rivals’ delivery options which do not suit customers – Ocado offers the most precise delivery times and information in grocery – and that the extra space given by the Dordon warehouse will allow the company to grow rapidly. A quick trip round the Willy Wonka-style wizardry of Ocado’s complex Hatfield centre would indeed reveal that space is a premium and the ability to serve more customers should remain a priority.
However, whether Ocado should target this increased custom in the short term is questionable. Its reach is further than some realise due to its spokes system and clearly the added marketing the etailer needs to invest in when it opens in Warwickshire is proving a burden on the company’s finances.
Panmure Gordon analyst and long-term Ocado sceptic Philip Dorgan said the move had provided a “lifeline” to a company he has claimed is facing “the end game”. However, he remains doubtful over the company’s model and strategy.
Earlier this year, Retail Week asked whether Ocado would ever convince its long-term doubters in the face of criticism while there remains a number of shareholders who are passionate about the company’s strategy to grow in non-food and focus on service.
Independent retail analyst Nick Bubb says: “The Ocado fan club remain fans, while nearly everybody else is sceptical about its business model.”
The company has a long way to go to provide a strong return to shareholders. If and when Ocado turns a profit Steiner will appear like Bond in Skyfall, a little bruised but ultimately vindicated.