(Bloomberg Opinion) -- One of the talents of Tim Steiner, chief executive officer of Ocado Group Plc, is knowing how to negotiate from a position of strength.
Over the past decade, the U.K.-based trailblazer for online grocery sales has been able to clinch contracts with British food retailers Wm Morrison Supermarkets Plc and Marks & Spencer Group Plc, offering digital capabilities just when they were most desperate to expand online.
Now Steiner is again living up to form, as he raised 1 billion pounds ($1.3 billion) this week. The move exploited a soaring share price, a big increase in online grocery orders and a shortage of investment opportunities in the convertible bond market. Quite a feat for a company that has made a pre-tax profit in only a handful of its 20 years of operation.
The capital raising is certainly opportunistic. Ocado already had about 1.2 billion pounds in the bank. The excitement around online shopping has also elevated Ocado’s share price, from around 13 pounds at the start of the year to more than 20 pounds before the fundraising announced late Wednesday. The company is right to take advantage of these factors while it can, because they may not be around forever.
Steiner clearly thinks there are more gains to be wrung out of the post-pandemic retail landscape. Mindful of the accelerating switch from buying food in stores to simply clicking a mouse or tapping on a smartphone, its online partners around the world, such as U.S. grocer Kroger Co., may want to attack the online grocery market even faster. Ocado also anticipates a surge of interest from other big international supermarkets wanting to use its automated warehouses.
Ocado raised 657 million pounds by selling a roughly 5% stake in itself at a 6% discount to Wednesday’s closing price. The rest of the windfall came from selling bonds that will convert into stock if the share price hits 26.46 pounds a piece — more than one-third above where the shares are now. The deal effectively offers Ocado the chance to raise equity at a higher price in the future, minimizing dilution for shareholders.
But investors should be aware of another Ocado trait: plowing money into expensive infrastructure with little to show for it by way of returns.
Since 2000, Ocado has invested about 1.4 billion pounds in its retail business, according to Mike Dennis, an analyst at Bloomberg Intelligence. But since going public in 2010, it has made a cumulative operating profit of only about 100 million pounds from this division, which is now a joint venture with Marks & Spencer.
The company’s thesis has been that more grocery shopping will soon shift away from physical supermarkets and take place online instead. It also believes that relying on big state-of-the art warehouses and robots to fulfill orders is a far more efficient approach than stocking store shelves.
It’s right on the first point. Online’s share of food shopping has almost doubled in the U.K. in recent months, according to Nielsen, from 7% before the pandemic to 13% in May. The second point is not as certain. The trouble with Ocado’s model is it needs expensive infrastructure. The more sales grow, the more warehouses and robots are required. As I have pointed out before, stores with employees are more flexible: They don’t need to add huge distribution centers or install whizzy technology — both of which are costly and time-consuming — to scale up. Employees in existing supermarkets can simply pluck more toilet rolls or cans of beans off of their shelves and put them into crates.
Ocado’s need for capital gets even more acute when it agrees to operate the online grocery businesses of big international retailers, such as Japan’s Aeon Co., with whom it struck a deal late last year. While these contracts should eventually generate lucrative fee income, they entail a substantial upfront capital cost.
The company’s fundraising has preempted a possible spate of new agreements with grocers around the world, tantalized by the prospect of more online shopping, and put an extra billion pounds into its coffers. If Steiner doesn’t use this wisely, he won’t be able to win over shareholders so easily next time around.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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