Confidence that the online groceries shopping market has reached an ‘inflection point’ has convinced Ocado to turn to investors for an additional £1 billion war chest. The funds are earmarked for the construction of more of its robotic warehouse – logistics facilities almost fully automated by Ocado’s proprietary technology.
Automated warehouse technology especially designed for facilities used for groceries ordered online is superseding the tech company’s original business of actually fulfilling the orders itself. A number of major licensing agreements for Ocado to build and sometimes also operate automated warehouses for international supermarket chains has seen the Ocado share price surge by over 55% this year.
The Ocado share price has dropped sharply this morning, down almost 6% in early trading because the raise means existing shareholdings are diluted. But investors will no doubt forgive the dip, given gains already recorded over 2020 and the fact the cash should help drive the company forward as the global leader in warehouse automation technologies.
Tim Steiner, the Ocado CEO and co-founder, has convinced investors raising the cash to invest in building more robotic warehouses, which are much more profitable than fulfilling online groceries deliveries but require heavy upfront investment, will allow the company to cement its market leading position at an ‘inflection point’ for the market.
The Covid-19 pandemic and resulting international lockdowns has accelerated the trend towards online groceries shopping in favour of a visit to the supermarket. Various studies have suggested new users and demographics who are now used to ordering online plan to continue to do so for at least part of their regular groceries shops. The company admitted it was unable to cope with the surge in demand for its own deliveries services in the UK at the peak of lockdown.
To take advantage of the opportunity, £650 million will be raised from existing investors, including a £7 million offer to retail investors. An additional £350 million will be brought in through a convertible bond issue.
Ocado was founded in 2000 by Mr Steiner, alongside two other former Goldman Sachs bankers. For much of its history, the company has struggled to convince investors to stick with its low margin online groceries platform and delivery business. At various points Ocado has been the most heavily shorted company on the London Stock Exchange.
A pivot into developing and licensing the logistics technology that groceries logistics warehouses will run on in future has, however, seen a huge turnaround in Ocado’s fortunes. After signing a number of technology licensing and warehouse operation deals with major international supermarkets, Ocado is currently worth £14.9 billion – more than the combined values of Sainsbury’s Morrison’s and Marks and Spencer.
Ocado also still runs its own online groceries shopping and deliveries business in the UK. Over recent years it has worked in partnership selling Waitrose products but with that agreement expiring, a new partnership with Marks and Spencer worth £750 million will commence later this year.
The increase in online orders over the Covid-19 pandemic means Ocado believes the partnerships it has signed with international supermarkets may see capacity investments brought forward or scaled up. With Ocado responsible for the upfront cost of new fulfilment centres it builds for partners, each of which costs millions of pounds to kit out with automation technology and systems, liquidity will be required to meet that demand, should it arrive as expected.
In the UK, 6.5 million more people are buying groceries online than were doing so before March and the market has doubled from 7% to 13% of total groceries purchased. That’s a trend reflected in other developed economies. And one Ocado hopes to take advantage of.
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