Last week, analysts at independent equities broker Redburn signaled that they had lost confidence in Ocado. Downgrading the online grocery firm’s status from ‘buy’ to ‘sell’ is an indication of experts’ doubt regarding Ocado’s ability to generate profit. In response, Ocado has announced a new deal with melon juice start-up Mello expected to generate £100,000 in revenue in the first year.
Despite the slight increase in share value of its long-term partner Morrisons due to its improved performance in recent weeks (and even this good news is tempered by the supermarket’s continued loss of market share to its rivals Aldi and Lidl), Ocado’s own shares have slumped by 13 per cent to 351p.
Redburn analyst James Tracey has argued that Ocado’s recent poor performance has been clouded by its impressive EBITDA performance, which according to Tracey is misleading. Ocado’s investment in joint ventures with Morrisons, for example, has meant that its EBITDA has “benefited from recharges and cost capitalization”. The reality is that Ocado has never generated positive pre-tax earnings and is “unlikely to do so for the next four years”.
The crisis of competitor supermarket Tesco will be a further cause for concern for Ocado. It is predicted that Tesco will roll out further price cuts in an attempt to put the pressure back on its rivals, making the most of its economies of scale. As Ocado has claimed to match prices against Tesco, this news will be received coldly by Ocado. Nevertheless, Ocado will hope that new partnerships such as Mello can resuscitate the company.
Mello is the first raw melon juice brand in the UK, using high pressure technology to overcome the problems of preserving fresh melon juice that had prevented its mass production for sale in supermarkets. Its founder, Rose Aldean, hopes to replicate the popularity of melon juice in the Middle East (where, she claims, it is a “big thing”) in British supermarkets. Melons themselves are already very popular in the UK, regularly topping the list of best-selling exotic fruit, with 300,000 tonnes of melon and 470,000 tonnes of watermelon sold during the summer months of May and June alone.
In addition to Ocado’s deal with Mello, the melon magnate Aldean has signed further contracts with Whole Foods Market, Planet Organic, Harvey Nichols and other independent stores.
In light of Ocado’s recent poor performance, its management has stressed that retail is only one part of what the company has to offer. Ocado’s CTO Paul Clarke has pointed to the activity of ‘Ocado Technology’, which is involved in deals including a major move to cloud platforms, and experiments with smart vision systems and robotics, as evidence of the company’s versatility.