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Ocado’s major breakthrough... but at what price?
Online grocer Ocado (OCDO) has finally struck a major deal to power an overseas supermarket with its technology. This is a major breakthrough for the business as the desire to strike a major international partnership has been touted by the company
for a very long time.
While the shares surged by 20% on the news (28 Nov), are investors getting ahead of themselves? A closer look at the finer details shows that Ocado won’t make any money on the agreement with French supermarkets operator Groupe Casino in the near future.
Most licencing deals involve a third party paying money to use an established platform. Theoretically the intellectual property owner sits back and lets the cash roll in; or perhaps more realistically it slots in a proven system and a partnership can hit the ground running.
The new deal suggests Ocado will have to bear a larger chunk of costs than one might have initially expected. Therefore the market will continue to pay close attention to the company’s cash burn going forward.
Ocado will provide its OSP (Ocado Smart Platform) system to build and drive Casino’s online food business in France. That encompasses everything from robots that pick groceries to software that routes delivery vans.
The odd bit, in terms of a traditional licencing deal, involves a lengthy period to set up the partnership. The two companies will spend at least two years building a customer fulfilment centre to serve the Greater Paris area, as well as the Normandie and Hauts de France regions.
The pair will also consider further development of other customer fulfilment centres close to other large urban areas.
The partnership will have minimal impact on Ocado’s earnings in the current financial year to 3 December and will be ‘earnings neutral’ next year, since the fees earned will be offset by the costs of establishing the partnership.
‘In full year 2019 and beyond,’ promises Ocado, ‘the profitability of Ocado Solutions is likely to grow as the fees from the transaction increase and as other deals are signed’.
Chief executive Tim Steiner, whose first overseas deal with a mystery regional European retailer in June disappointed some investors, says he expects the Casino deal to be the first of numerous collaborations with retailers around the world.
We imagine there will be numerous analyst research notes in the coming days reappraising the Ocado investment case with the assumption that if a major international food retailer has endorsed the UK business’ technology, so too will others.
We will write a more detailed analysis of the stock in the New Year once more information is available on the Casino deal and from the analyst community. (JC)
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