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View from the City – Ocado

If there is one thing we
can be certain of over the past few weeks it is that food delivery has moved
onto a new level of demand as the lockdown has driven significant adoption of
the services of the main supermarkets.

Customers have flocked to
the major grocers and created seriously long virtual queues with the result
that Morrisons has upped its capacity by 60%, Tesco has been looking to add 33%
more delivery slots, and Sainsbury’s has rolled out its click & collect
capability to more locations.

Alongside home delivery
there has been an uplift in demand for click & collect, which is a route
for the grocers to dramatically increase their online ordering proposition as
they leverage value from their in-store picking model and extensive nationwide store
estates. They have been able to basically bump up their capabilities by throwing
more people at the problem, which has included using more vans located in store
car parks rather than for home deliveries.

Such moves have not been possible
for Ocado, which relies on its automated technology and vans to fulfil orders
to the home. It is not able to crank up the speed with which its robots operate
and it only has a finite number of vans. Yes, it can add vans but the velocity
of its robotics is not a variable it can play around with, and it does not have
the benefit of offering click & collect.

The present levels of
demand will clearly fade but the new audience that has been attracted to online
grocery shopping might well have changed the multi-channel dynamic in the food
sector – potentially with click & collect becoming a bigger feature.

This scenario has led
broker Jefferies to paint a possible bear story for Ocado and its OSP (Ocado
Smart Platform) model in a recent note. It questions the logic of grocery operators
buying into an incremental fixed cost structure that is very capital intensive.

Experience has shown that
bears have paid a very high price when messing with Ocado. Its share price has
been one of the top performers over the past two years and one of the more
resilient during the Coronavirus pandemic. Like many before it Jefferies raises
some valid points about Ocado but it is a very brave investor who takes a
negative position.

Glynn Davis, editor, Retail Insider

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