While Ocado’s deal with Morrisons goes a long way to validate its operating model, its potential will only be recognised fully if it can be consistently profitable.

While Ocado’s deal with Morrisons goes a long way to validate its operating model, its potential will only be recognised fully if it can be consistently profitable.

2013 was a transformative year for Ocado, the deal it struck with Morrisons provided validation to investors and the wider industry that it is on the right track. Its model is hugely efficient in the fact that it delivers the right products to the right places which is, of course, appealing to other grocers. For this reason, it is no surprise that chief executive Tim Steiner is receiving interest for more partnerships from grocers across the globe.

However while the model may well be efficient in terms of its complex mechanics and algorithms, Ocado’s UK retail operation – which is now a distinctly different beast to its ‘technology’ arm – is yet to make a consistent profit.

What’s the point in being über efficient operationally if you are inefficient financially? Sure, investors and the City have seen the potential in Ocado so far, but yet another year of losses begs the question whether the second level of validation of the model – consistent profitability – will occur soon enough.

Interest will come from international players looking to make their mark on the global online grocery scene, a burgeoning market with huge potential. But how significant is that attraction going to be when the model they are buying into is yet to prove its financial sustainability?

Morrisons was desperate. Chief executive Dalton Phillips was in dire need of a solution to his online woes when he struck the deal with Ocado in May 2013. Other players are unlikely to be in the same position though. The UK market is arguably one of the most advanced in online grocery, meaning Morrisons was at a serious disadvantage compared to its peers.

In a foreign market with very little online grocery penetration, all the players are starting from the same place, and there is less of a need to rely on Ocado to build an offer when there is less to be lost from starting from scratch.

Fundamentally, the crux of the problem is the cost of home delivery of food. This is an issue which is far from unique to Ocado and all grocers need to raise delivery charges in order to break even online.

However, its UK rivals have other options and we will see click and collect become a far more important part of the UK grocery market. If Ocado raises its delivery charges, there is a real risk that it will lose shoppers to other operators; opening it up for further scrutiny and making it look like a far less attractive stable mate to potential international partners.

Andrew Stevens is a senior retail analyst at Verdict

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