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Is Ocado putting its infrastructure up for tender?

Online supermarket Ocado gave further indication this week that it views itself as a technology business as well as an internet grocer, signalling its intent to create further partnerships like its recent tie-up with Morrisons.

In a half-year report, which showed that the company recorded profit before tax of £7.5 million in the 24 weeks ending 18 May 2014, the business said it is making progress with the re-platforming of its IT systems, which it hopes will "enable faster replication and roll out of our technology".

At the same time, CEO Tim Steiner said that the online supermarket group continues to receive interest from potential partners in international markets, with discussions reportedly centring on how Ocado "might assist them in introducing or improving online business in their own markets".

Ocado launched its partnership with the UK's fourth largest grocer, Morrisons, earlier this year – and the deal, which sees the online company provide the backbone to the Yorkshire-based supermarket's online grocery operations, could prove to be a template for further collaborations within the retail sector.

Steiner described January's Morrisons.com launch as "successful" and said it "paves the way for future agreements to commercialise the value of our intellectual property". It was also suggested that the e-tailer's new modular, scaleable fulfilment hubs will allow the business to offer potential partners "a lower risk, less capital intensive platform solution for online retailing".

"We expect the model for these services to be weighted towards ongoing annual usage fees rather than the high upfront fees typical of the technology licensing market, which we believe will make it a compelling proposition to potential partners," Steiner continued.

Stephen Springham, senior retail analyst at industry intelligence group Planet Retail, argued that Steiner's comments on international partnerships were "a major signal of intent", in relation to licensing its model to other retailers.

"Ocado is not putting itself up for sale, but is effectively putting its infrastructure and know-how up for tender," he told Essential Retail.

"Who may take them up on this is still subject to speculation, but the business is clearly courting international operators. If suitable partners are successfully found, the oft-debated issue of whether the business can be profitable may ultimately be put to bed."

Analysts have suggested for some time now that licensing its fulfilment assets could be the future primary profit stream for Ocado, as opposed to simply online retailing, but there is no denying that the company is operating in a growing market where there is still significant growth potential for the businesses that manage to get e-grocery right.

Research group IGD published new data on Monday, which estimated that the UK grocery market will be worth £203 billion by 2019 – an increase of 16% from its current value of £175 billion.

Discounters, online and convenience is expected to account for over 40% of the market in five years' time, with e-tail set to be the fastest growing part of the market, more than doubling in value to £17 billion over that period. IGD says it expects online to represent 8% of the market, boosted by a surge in usage of home delivery and click & collect services.

Ocado reported a 20% increase in its top line for the six-month period, with revenue at £429.7 million, while active customers showed a year-on-year increase from 360,000 to 396,000 and the average basket size dipped slightly to £114.43.

The improved sales come at a hugely challenging and competitive time for the grocery market, with all the major players experimenting with new fulfilment options. Ocado's sourcing partner Waitrose, meanwhile, has also quickly developed a popular eCommerce operation in its own right over the last few years.

"Ocado's core business model remains unproven despite the welcome move into the black in the first half," Springham explained.

"Stripping out the fillip from Morrisons.com – for which Ocado has been overpaid by Morrisons in its desperate efforts to play catch-up – the level of profitability would have been much lower." 

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