One wag famously once said Ocado begins with an ‘O’ and ends with a zero, but it seems to be very much alive and kicking.

One wag famously once said that Ocado begins with an “O” and ends with a zero, but it seems to be very much alive and kicking.

It’s always been easy to mock Ocado’s business model and it’s not so long ago that some people thought that the shares were worthless and that the company might run out of cash, although many of those doubts were relieved by the lucrative deal with Morrison’s. After a stellar rise in the share price last year, Ocado is now capitalised at nearly £3bn.

However, the business is still losing money. Today’s finals were expected to show a small underlying loss of about £4m but the actual loss was just over £5m, pre-exceptional costs, which will delight the bears of Ocado, despite a £0.9m profit conjured up from the joint venture with Morrison’s.

Incidentally, the mind-boggling accounting policies for the new joint venture will test the prowess of even those analysts with top-of-the range anoraks.

EBITDA was, however, ahead of the expectations of £42m/£43m at £45.8m, on gross retail sales of £843m, albeit depreciation and amortisation charges were hefty at £44m (of which about £10m came from a half-year of the second warehouse).

In a capital and IT software-intensive business such as Ocado, these sorts of P&L charges are bound to be heavy and the depreciation line will step up to £55m to £60m in the new financial year.

The retirement of co-founder Jason Gissing, often quoted by the press as the scourge of Ocado’s partner Waitrose, is surprise news, but he hasn’t been actively involved in the business for a while. Chief executive Tim Steiner and Chairman Stuart Rose paid him fulsome tribute, while the cynics said that a placing of his share stake can’t be far away.

All the focus today was expected to be on the success so far of the tie-up with Morrison’s, the prospects for a third Ocado distribution warehouse and an update on the hopes for a lucrative licensing tie-up with an overseas supermarket chain.

But Ocado said nothing about all that. The statement focused on the “unstoppable” momentum in online grocery shopping and the brilliant way in which the business is exploiting the massive channel shift taking place in the market.

The statement by Ocado that “in 2014, we expect to grow broadly in line with, or slightly ahead of, the market” seems a bit subdued and given the “unstoppable” momentum in online grocery shopping, it seems a bit disconcerting that Ocado isn’t growing even faster. But perhaps the bears are missing something.

To be fair, Ocado is focused on the long term, but over Christmas sales growth did accelerate to over 20% and it hasn’t had to chase business so far in 2014 with aggressive promotions.

There was a pointed reference in the Q&A at the analysts meeting to the “free champagne” offer by Waitrose to new online grocery customers last month, and Ocado made clear that it is focused on loyal and frequent customers, without relentless vouchering.

Ultimately, how fast Ocado can grow is limited by the capacity of its distribution warehouses and ‘spokes’ and the delivery operation. With the opening of Dordon a year ago, the two existing central warehouses can do £1.8bn in gross grocery sales (of which £500m would be Morrison’s), but both sides are keen to lay down more capacity, implying that Morrison’s is very pleased with how things have gone so far.

Ocado has ambitions to go way beyond £1.8bn in annual grocery sales in the UK, quite apart from all they are doing in non-food and all they hope to do overseas, and one of the main messages today was that it plans to add more capacity in a more timely and capital-efficient manner than before - implying that the much vaunted third warehouse won’t be a monster like Dordon or Hatfield.   

The Ocado management team aren’t to everyone’s tastes, but they are undeniably clever and the work taking place this year to re-platform the proprietary IT to a cloud-based format will help the migrate the model more easily overseas.

A year ago the Ocado technology department comprised 300 people. It now has 400 and in a year’s time it will have 500. And the £15m of capital earmarked, mysteriously, for R&D this year will be expected to generate a return of a bit more than zero.

  • Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.

Ocado co-founder Gissing retires as full-year losses widen