Friday, 11 September 2009

The Internet Bubble Expands Again

I like to see what I am getting before I buy when it comes to groceries but I must admit you cannot beat the sheer convenience of online grocery purchases once in a while.

Like most people, my wife and I will sit down and do an online supermarket shop sporadically. We mainly use Tescos but once in a while we use Ocado because we like the Waitrose brand. Either way we always marvel at how little we have bought, how much of the same thing has arrived, how many items differ to the brand we asked for and the staggering price of so few goods. We often remark that we could have got a good trolley load for far less and ask ourselves where has the money actually gone when we online shop for groceries.

Such questions are more evident when we use Ocado. Focusing on the Waitrose brand, which itself is reassuringly damn expensive, the quality is a good deal higher than Tescos, we convince ourselves. Certainly, the meat and fish products are but often the cold meats and tidbits are nicer too. However, for the most part, the popular brands are the same across the board. But when the Ocado delivery arrives, a few bags seem to have cost an absolute fortune.

So I was surprised when I read yesterday that Al Gore's special 'green fund', Generation Investment Management, is part of a group of investors who have injected around £30m into Ocado, the rest has been stumped up by Fidelity Investments and the shareholders, of which the John Lewis Pension Fund is a large one. The fact is that over the years, Ocado has raised more than £350m and has around £100m in debt, much provided by Lloyds Banking Group. In response, Ocado's sales will be £450m this year and that is reckoned to be a whacking 20% of the online supermarket sector - which analysts expect to grow to £40bn over time. To date, Ocado has not made single penny in net profit and even this year its projections are for operating profit only. Similar outlooks abound for future years as it focuses on building market share before making profits.

Growth is beautiful, and focus on the topline.

Is it me, or is that the internet mantra all over again? You cannot beat grabbing market share in a growing market but reality sets in over time. Ocado may have 20% of the online grocery business today but that does not reflect its true market share in the grocery sector as a whole. Unless it changes its value proposition in terms of what it offers, as this market grows it will tend toward its natural market share, in my humble opinion. That, in time, might still make it some money. But Waitrose has a different bunch of investors or partners to answer to and this makes its narrow, high value shopping a brand itself and the partners like it. But in the cruel world of online retailing, cost may become the key as one of the greatest features of online shopping is the ability to compare prices over a range of shops - item for item. Today this is limited to insurance, travel or electronic goods largely but sites like and have a principle and model which is easily repeatable for a range of goods. So if you know what you like in terms of brands, in time, you should be able to easily compare which store is offering the best deals for your shopping trolley before you pay.

If all the clever advertising by Asda, Sainsbury and Tesco is anything to go by, then the online world of supermarkets will get very different in the future and competition will get vicious and cut throat. I believe Ocado is not particularly well positioned and I would focus on getting some money flowing in for the right reasons rather than for speculation. After all, we have seen this all before.

The internet boom is coming to the supermarket world. Pat your virtual bums and start shopping around.

No comments: