Online grocer Ocado has overtaken Tesco in terms of market value as investors continue to bet on the company.
Ocado is now valued at £ 21.7bn, more than Tesco’s £ 21.1bn, although it only holds a fraction of the UK grocery market.
Analysts said an increase in online food purchases, as well as Ocado’s new link with Marks & Spencer, had encouraged investors.
However, question marks remain as to whether Ocado is overvalued.
According to analyst firm Kantar, Ocado has just 1.7% of the UK grocery market, compared to Tesco’s 26.8%, which far exceeds its closest competitors, Sainsbury’s and Asda.
Ocado launched 20 years ago, but for most of those years it has struggled to make money.
Ocado’s share price, which had been healthy after making a number of big deals with foreign grocery stores, started to climb quite quickly after the UK coronavirus lockdown in March.
A former Tesco CEO described the company as a “charity” because of the losses it had racked up in its early years.
The company began to prosper in 2017 after concluding agreements with the American group Kroger, Casino in France, Sobeys in Canada and ICA Group in Sweden. He then signed a partnership agreement with Coles in Australia.
Its market valuation has been largely driven by the way investors view its technology, which provides retailers with the infrastructure and software needed to build their service online and compete with giants such as Amazon.
That assessment accelerated after the coronavirus crisis really started to bite the UK and elsewhere in March, as the lockdown increased demand for online groceries.
Ocado’s share price rose recently after its switch to M&S food distribution and after announcing a 50% sales increase in the third quarter.
- Ocado Says M&S Transition ‘Successful’ After Difficult Start
- Ocado Temporarily Stops Deliveries From Its Staff Due To Backlog
This is despite some customers criticizing Ocado when it launched its M&S range, claiming that orders placed weeks earlier were canceled at the last minute.
The retailer also halted orders from its staff as it tried to eliminate an order backlog.
Despite his popularity with investors, Neil Wilson, chief market analyst at Markets.com, questioned his market valuation.
“Ocado is very promising, but it is quite different whether it can deliver on its promises, the consumption of liquidity remains and the return on investment of all these deals abroad takes a long time,” he said. -he declares.
One of the reasons for Ocado’s valuation is the expected income from its overseas transactions, but these “have been slow to materialize,” he said.
While Ocado’s stock price “has skyrocketed this year thanks to the boom in online retail,” one of the problems for Ocado is that “it is costly to set up distribution centers. expensive and returns are slow, ”Wilson said.
He added that “investors place a huge premium on growth and are therefore willing to pay a lot for any business that has a strong growth profile.”
Julie Palmer, partner at Begbies Traynor, said the coronavirus pandemic has helped the business: “Where there is crisis, there are opportunities. Those words have never been truer for logistics companies yet, which is one of the reasons Ocado is calling. investors. ”
However, she said the challenge for the company now is to maintain the growth it has seen since the Covid-19 outbreak.
“There is an elephant in the room with Amazon that could hit this industry hard with innovation through technology at any time,” she said.
“This is a fact that has to play in the mind of CEO Tim Steiner and must ensure that he does not become complacent,” Ms. Palmer added.
Amazon, which launched an online supermarket service in the UK in 2016, has taken new steps in the sale of groceries.
These include a partnership with Morrisons, which said on Tuesday it would hire 1,000 permanent employees for its services on Amazon.