Should Ocado turn its back on retail and focus on IT services?

How would you describe Ocado – retailer or technology company? The 15-year-old business only turned its first pre-tax profit in February – a year after launching Morrisons' eCommerce platform – so arguably it is better at being an IT service provider.

Ocado now says it is close to securing another deal to provide eCommerce services internationally, but where does this leave the future of the business?

While Ocado announced positive half-year results this week, the expected international IT services deal failed to transpire. But CEO Tim Steiner said this week that discussions with multiple potential partners are in progress, and it is on track to sign an agreement before the end of the year.

But with no concrete news on a partner, Ocado's shares fell just shy of 2% when it reported yesterday morning, and analysts shrugged off the results, with Kantar consultancy's Bryan Roberts calling the update "benign".

While the online grocer's half-year financials prove it can stand out in the crowded UK grocery sector by reporting customer growth of 30%, does its future actually lie in IT services?

Retail consultant at Conlumino, Sophie McCarthy, said rolling out its online platform globally will provide the e-tailer with growth opportunities as well as a key differentiator in an ever competitive market. But she also said Ocado must not lose focus of its UK business as it presses forward with securing its international deal.

Positive outlook

The UK grocery sector is a highly competitive market, and while the big four are struggling online, yesterday Ocado reported an 11.4% rise in EBITDA to £38.2 million, while half-year pre-tax profits fell slightly from £7.5 million in 2014 to £7.2 million for the 24 weeks ending 17 May.

In May 2013 Ocado announced an exclusive deal with Morrisons to supply its eCommerce platform, a move which led to the grocer gaining £200 million from online sales in one year, while the partnership pushed Ocado into the black for the first time. 

While under contract, Ocado can only supply eCommerce infrastructure to Morrisons in the UK. But this does not prevent Ocado seeking partners further afield, with rumours of France's Carrefour and Safeway in the US being possible future customers of the Ocado Smart Platform. These rumours were backed up when Steiner told the FT he was focused on partners in North America and western Europe.

Ocado's Smart Platform

Ocado's Smart Platform claims to offer potential retail partners a scalable, modular approach to eCommerce as well as better operational efficiency. But when it comes to securing the international partner, it might be more difficult than Ocado first anticipated, hence the delay of signing on the dotted line.

Miya Knights, head of Planet Retail's global retail technology practice, said: "There aren't that many big retailers at scale that don't already have eCommerce systems in place. And Ocado is going up against a lot of off the shelf packages, sold by a lot of big vendors, such as Oracle, IBM, JDA and SAP."

Knights also told Essential Retail that Ocado may have bitten off more than it can chew by signing an exclusive UK agreement with Morrisons. She said it may be finding it difficult to secure an international partner because it has no international experience when it comes to local regulations as well as currency and tax. "Maybe that's slowing them down and if they're internationalising part of their platform, they probably need a strategic partner."

What is its future?

But despite the delays, the question is more 'when' rather than 'if' Ocado secures an international partner.

And when it does, will it choose to leave behind online grocery to battle it out with the big four IT vendors? Knights doesn't think so. She said Ocado is hedging its bets and will probably continue to offer a mixture of both B2B and B2C services.

"As a grocery standalone organisation, they were loss making and needed to find other revenue streams," she commented.

"The general industry consensus is online grocery is loss making, but customers expect it," she added, saying grocers struggle with the low product margins and high cost of delivery.

So providing IT services the company spent the last 15 years building up is a sensible move, but Knights said that does not mean it should forget about being an online grocer.

If Ocado wants to offer online services, she added, it should continue to sell groceries online so it understands exactly what its IT customers need from online technology solutions.

Knights said it would be sensible for Ocado to offer both, saying being at the "eCommerce fulfilment coalface" will help maintain its expertise in the sector.