Why Ocado’s evolving strategy could boost its growth potential

Robert Stephens, CFA, considers why grocery technology specialist Ocado could have a bright long-term future.

The recent results from online grocery shopping business Ocado (LON:OCDO) showed that it is making progress in transforming its long-term growth outlook.

Although the company remained loss-making in the first half of the current financial year, with it recording a £142.8 million loss before tax, its revenue was boosted by the performance of its Solutions business. It recorded a rise in revenue of 20.6%, which contributed to a 10.5% increase in group sales.

With the company well-placed to capitalise on e-commerce trends in a variety of markets across the world, it could offer long-term investment potential in my view.

Pivot to technology

While Ocado is best-known for its online grocery operations in the UK that make up the bulk of its revenue, its Solutions business is transforming it into a technology-focused operation that could profit from a tailwind in global e-commerce trends. Indeed, it provides services, technology and automation to e-commerce businesses across the world.

During the first half of the year, the company continued to enter into partnerships with major retailers in a variety of countries to provide them with its Ocado Smart Platform (OSP). It is a proprietary solution for operating an online retail business, with it combining the latest technology with a physical fulfilment solution.

Not only does the OSP provide retailers with lower costs when compared to the investment that would be required to forge a major online presence on their own, it is also a faster and lower-risk means of gaining exposure to what is a rapidly-growing market segment.

Online growth opportunity

Indeed, between 2015 and 2018, the proportion of global retail sales that were conducted online increased from 7.4% to 11.9%. From 2018 to 2021, that figure is expected to increase further so that it reaches 17.5%. Beyond 2021, additional growth seems likely as technology improves and consumers become increasingly comfortable in using their mobiles to order a variety of products for home delivery.

As a result, Ocado’s increasing number of partnerships where its OSP is provided to major retailers in countries such as Canada, the US and Australia could catalyse its financial performance over the long run.

Threats

Those partnerships also increase its diversity at a time when UK consumer confidence is at a low ebb. In fact, the GfK consumer sentiment survey has a current reading of minus 10. This suggests UK consumers are highly pessimistic, with a figure of zero being neither optimistic nor pessimistic.

Since the company still generates the majority of its revenue from its retail operations and has agreed to a 50:50 joint venture with M&S, an uncertain outlook could hurt its prospects in the near term.


Furthermore, its forecasts suggest that profitability will prove elusive in the medium term. This could negatively impact on investor sentiment at a time when competition within the UK online grocery market remains high.

Outlook

However, with Ocado appearing to have a sound growth strategy that is set to transform its operations over the long run, it could offer investment appeal.

It plans to enter into an increasing number of partnerships to provide its OSP to other large retailers across the globe. This could maintain a high rate of sales growth over the medium term, with a continued shift towards online retail spending among consumers providing the company with a potential tailwind that may boost its stock price.