Ocado's pursuit of partnership deals to hit short term profit


By James Davey

LONDON, Feb 5 () - British online supermarket Ocado said on Tuesday investment in its partnership deals would hit short-term profits, while remaining tight-lipped about media reports of tie-up talks with Marks & Spencer.

The company also reported a 21 percent fall in full-year earnings, hit in part by new accounting rules.

The firm's shares have nearly doubled over the last year on the back of four major overseas partnership deals - the biggest of which was signed last May with U.S. supermarket chain Kroger.

Last week media reports said Ocado was in talks over a possible tie-up with Marks & Spencer (M&S), Britain's best-known retailer. M&S currently sells wine, flowers and clothes online, but does not offer a full food delivery service.

"It is our business to talk to retailers and we never comment on who we're talking to," Ocado Chief Executive Tim Steiner told reporters. M&S has also declined to comment.

The reports have centred on Ocado replacing its current main food supplier, Waitrose, with M&S. Ocado's deal with Waitrose, owned by the John Lewis Partnership, ends in September 2020, though it could be extended.

"We have a good relationship with Waitrose," said Steiner.

"In September 2020 we're still be in business, we're still be selling 50,000 plus lines to our customers, including high quality own-label products - they may be Waitrose, they may not be Waitrose, we'll have to wait and see."

Steiner said the retail side of Ocado's business remained critical to attracting technology partners.

"It's not a non-core asset that we're looking to dispose of," he said.


Ocado made earnings before interest, tax, depreciation and amortisation (EBITDA) of 59.5 million pounds ($77.6 million) in the year ended Dec. 2, down from 75.0 million pounds in 2016-17. Group revenue rose 12.3 percent to 1.6 billion pounds.

For 2018-19, Ocado forecast retail revenue growth of 10-15 percent as it increases capacity and grows market share. It also forecast growth in retail core earnings.

But it said that while the targeting of further partnership deals would generate additional cash fees for the technology solutions division there would be a short term hit to profits.

The adoption of a new accounting standard will mean technology solutions revenue will only be recognised once a customer's first automated warehouse - which Ocado calls a customer fulfilment centre (CFC) - is opened. However, build costs will still have to be recognised.

With no CFCs expected to open in 2019 Ocado forecast a decline in technology solutions EBITDA, due to 15-20 million pounds of additional operating costs necessary to prepare the CFCs and to provide features on the platform.

Total capital expenditure for the group in 2018-19 is expected to be 350 million pounds.

Shares in Ocado were up 0.8 percent at 1,000 pence at 0952 GMT.

"While we believe there is scope for further international deals, we think there is a great deal for management to now execute on and thus see a low likelihood of another major deal in the near term," said RBC Europe analyst Sherri Malek.

($1 = 0.7670 pounds)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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