1. Ocado Ltd. Financial Analysis Report- 1997 words
1. Background
1.1 Company Background
Ocado is an upscale online platform for online grocery shopping that operates within the
UK. It provides a daily service that covers more than 70% of the country’s population and
is considered to be the world’s largest online grocery retailer.
In 2014, the Ocado group rolled out two new online retail sites: Fetch and Fizzle. Fetch is
a standalone online pet store that provides more than 8000 pet products. Sizzle is an
online kitchen and dining outlet that sells premium kitchen products. Since its launch,
Sizzle hosts more than 12000 products (Ocado,2014).
While Ocado can be seen as a online retail company, it can also be viewed as a
technology company. In 2014, the Ocado group entered a 25 year agreement to
implement and provide operating services for their online grocery retail platform to launch
and run Morrisons.com. Based on its success, the company plans to continuing
commercializing its technology in the future (Ocado, 2014).
1.2 Strategy
Ocado’s main focus has always been to develop the best platform for online grocery
retail. This places Ocado in a unique position and gives them a number of sustainable
competitive advantages.
At its core, Ocado.com, runs its operations on a platform that is unique to any of its
competitors. Developed themselves, the platform is a unique end to end operating
solution for online retail. Ocado has this intellectual property patented, creating a barrier
to entry for grocery retailers trying to enter the online space. To gain access to this
technology infrastructure, traditional grocery retailers either need to develop their own
technology systems or become commercial partners with Ocado.

2. Ocado Ltd. Financial Analysis Report- 1997 words
Business operations at Ocado are solely focused on online activities. This sets Ocado
apart from many other traditional grocery retailers and provides them many cost
advantages. Firstly, Ocado does not have any brick and mortar stores. This saves on
investing in high fixed cost stores as well as in-store labor costs. Another aspect of
Ocado’s business operation that gives them cost advantages is the use of central
fulfillment centers (CFC). CFCs are where all stock is received and held and all customer
orders are picked. By having everything centralized in one location, Ocado is able to
minimize property and occupation costs and reduce product waste. The service that
Ocado provides to consumers also differentiates it from other competitors. Without the
limitations of store space and shelving, Ocado can have wider product selections at
competitive prices. As of now, Ocado hosts more than 48,000 different products.
Additionally, with faster stock turn and advanced picking systems, Ocado ensures fresher
food being delivered to consumers.
1.3 Industry and Competition
Industry Growth Rate
The Ocado Group operates within the UK e-commerce grocery industry, a sub-group
within the traditional grocery retail industry. Despite being a relatively young industry,
industry growth has been expanding rapidly over the years. Sales via online super
markets have increased by 81.9% from £4.15bn in 2010 to £7.55bn in 2014 (Key Note,
2014). Key Note estimates that over the next 5 years, the UK internet grocery market will
see double digit growth for each consecutive year, peaking at £21.65bn in sales in 2019.
As more consumers have access to the internet and choose to order groceries online
over stepping into physical stores, internet groceries have the potential to takeover
traditional grocery retail. There is a strong possibility that physical retailers moving online
may cannibalize their existing store businesses.

3. Ocado Ltd. Financial Analysis Report- 1997 words
(Key Note,2014)
Concentration and Balance of Competitors
With certain exceptions like Ocado Ltd. and Waitrose, most of the key players in this
industry are the leading supermarket retail chains: Tesco PLC, ASDA Group Ltd, J
Sainsbury PLC. Out of all of participants in e-commerce grocery industry, only Ocado is
fully online based. The rest have a strong presence in traditional retail. Below is a pie
chart that outlines that market share of the UK internet grocery market. As of now, Tesco
Plc is the leading online supermarket business in the UK.

4. Ocado Ltd. Financial Analysis Report- 1997 words
Other smaller grocery retailers are also following this trend, implementing their own
online platforms, creating a saturated highly competitive market. However, the large
demand for the convenience of E-commerce is an indicator that there is still room in the
market for a large number of competitors.
Excess Capacity and Exit Barriers
Regardless of the ongoing demand for online groceries and its convenience, food
products in general is price elastic. There is often the case of more supply than demand
(excess capacity). Over the years, the number of different grocery shopping channels
have increased giving consumers wider access to different retailers and to better product
price deals. Apart from price competition between the online grocery retailers
themselves, they also face heavy competition from no frills physical retailers. The profit
margins of these companies often face heavy pressure due to competitive discount
pricing.
While the industry is extremely difficult to compete in, it is also relatively difficult to exit.
Most online grocery retailers in the industry require substantial fixed asset investments in
additional warehousing, technology infrastructure, and vehicles to implement a proper
end to end grocery retail solution.
Degree of Differentiation/ Switching Costs
In general, food products sold in online retail stores tend to be homogenous. Unless it is
premium or of extremely high quality, food products are a commodity. As a result, food
products, can be extremely price sensitive. The price sensitivity of food can be extended
when internet access reduces information asymmetry and online grocery shopping
removes any considerations for store locations. Switching costs in this industry are close
to nothing. Consumers that don’t enjoy the online services of one retailer can simply
switch to another with the click of a button.
Threat of New Entrants
The infrastructure costs of creating a large online grocery retail business are substantial.
Most of the time, companies hoping to create such online stores are physical grocery
retailers with pre-existing stores. Its not always easy juggling between traditional and
online retail. In fact, a number of leading supermarkets and grocery stores have still failed
to enter the internet grocery market (Key Note).

5. Ocado Ltd. Financial Analysis Report- 1997 words
Buyers Bargaining Power
Online grocery retail has made the pricing of food products more transparent. It is easy
for consumers to compare and contrast prices from different retailers to find the best
deals. This makes food products more price sensitive and gives buyers more bargaining
power.
2. Financial Analysis
2.1. Overall Profitability
Table 3.1 shows the ROE based on the reported earnings for Ocado and J. Sainsbury.
Ocado’s ROE in 2014 (5.36%) has shown significant improvement compared to the ROE
in 2013 (-4.02%) and 2012 (-0.72%). This can be explained by increases in net profit and
sales between 2014 and 2013. In 2014, Ocado made a net profit of £ 11.5mil compared
to the net loss of £8mil made in 2013. Sales increased as a result of an increased
customer base from 70,000 to 453,000 (BBC, 2015). The increase in profitability can also
be explained through their monetization of Intellectual property through the partnership
with Morrisons (Ocado, 2014). A positive ROE figure for Ocado is significant because it is
the first year that an annual profit has been reported for the company since its launch in
2000.
Sainsbury has reported a much higher average ROE over the past three years of 17.23%
compared to Ocado’s ROE of 0.21%. This is an indication that Sainsbury’s management
is much better at employing the funds invested by the firm’s shareholders than Ocado.
2.2 Decomposed Profitability
Table 3.2 shows the traditional breakdown of ROE for Ocado and J. Sainsbury. In 2014
Ocado’s increase in ROE is mainly due to a large increase in net profit margin from -1%
to 1.21% and to a lesser extent an increase in the asset turnover ratio. The breakdown
also shows how Ocado has a weaker net profit margin, return on assets, and equity
multipiler than J. Sainsbury. Despite of this, Ocado seems to outperform in terms of asset
turnover across the three years of performance. This implies that Ocado is much more
efficient at its use in generating sales with its assets compared to J. Sainsbury. This is
consistent with the company’s strategic dependency on its cost effective online platform.

6. Ocado Ltd. Financial Analysis Report- 1997 words
2.3 Operating Management
Over the last two years, Ocado’s net operating profit margin has seen a 2.01% increase,
increasing from -0.84% in 2013 to 1.17% in 2014. Looking at the line items as a percent
of sales in table 3.4, majority of the increase in operating margin comes from the
increase in other income of 1.78%. Net operating expenses only plays a small part in the
improvement of operating profit margin, going down by 0.11% (1.73% decrease in CoS
and 1.62% increase in SGA) in 2014. Mainly because of higher profitability, J.
Sainsbury’s operating profit margins are consistently higher than Ocado’s.
In general, Ocado has impressive gross profit margins that show improvement
throughout the past three years. In 2014 Ocado’s profit margins increased by 1.73% from
31.25% to 32.98%. Sainsbury’s profit margins have been consistently weaker than
Ocado’s, this year being 5.7 times smaller. This can be mainly attributed to Ocado’s
efficiency in procurement, evident by the much lower ratio of cost of sales expense to
sales.
Despite the great profit margins, Ocado has relatively high SGA expenses that cut deep
into profits. As a result, Ocado’s net operating expenses have been always been greater
than its sales. For Ocado, net expenses for the past three years have on average been
2.57% greater than its sales figure whereas net expenses for J. Sainsbury on average
have been 4.27% less than sales. Considering that the company is still so young, these
high SGA expenses may be attributed to research and development costs for expanding
and developing its online platform. This may be the case after launching Fetch, Sizzle, as
well as becoming a commercial partner with Morrisons this year.
2.4 Investment Management
Table 3.5 shows the Asset management ratios of Ocado and Sainsbury. In 2014, Ocado
became more efficient in its working capital management increasing from -1.54% to
–0.77%. This can be seen by the increase in trade receivables turnover and days’
receivable and a decrease in days’ payable. The increased working capital efficiency is a
combination of Ocado using central fulfillment centers for efficient distribution and strong
supplier relationships. In contrast, Sainsbury showed a decrease in working capital
management from -4.61% to -8.17%.

7. Ocado Ltd. Financial Analysis Report- 1997 words
2.5 Financial Leverage
Ocado’s liability-to-equity and debt-to-equity ratio are close to unchanged in 2014.
Comparing Ocado’s debt ratios to Sainsbury’s shows that it adopted a less aggressive
debt policy. It can be seen that the debt to equity ratios of both companies are greater
than one, implying that the increase assets invested in are mostly funded by debt instead
of equity.
In terms of short term liquidity, Ocado outperforms Sainsbury in all fronts, suggesting that
Ocado has more available current assets that can be used to repay current liabilities. The
liquidity ratios for both food retailers are below one mainly due to their high asset
turnover rates from having to store perishables.
3. Summary
Overall Ocado’s Cost advantages strategy were not fully reflected in the analysis. Key
performance ratios such as ROE and Net Operating Profit margin were lack luster in
comparison to its peers. The cost strategies designed to keep SGA expenses low has not
been achieved due to large amounts of research and development costs and
perhaps overhead cost inefficiencies. However, Ocado’s central fulfillment centers have
been promising, increasing working capital efficiencies and gross profit margins.
Being one of the big four retail supermarkets, Sainsbury was a good benchmark for
Ocado. Sainsbury draws a number of similarities to Ocado, but is in fact a much larger
company with more sales and profit. Being its first year to make an annual profit, Ocado
has a long way to go to reach the scale and profitability of its peer. Hopefully after a few
more years, Ocado will develop the backbone to maximize its cost efficiencies to raise its
profitability and continue growing alongside its titanic peers.
References

8. Ocado Ltd. Financial Analysis Report- 1997 words
BBC News, 2015. ‘Ocado Reports First Annual Profit’. BBC UK [online] 03 February 2015
Available at: http://www.bbc.co.uk/news/business-31108569
Accessed November 11, 2015
Key Note. (2015) E-commerce: The Internet Grocery market. 2015. [online] Available at:
https://0-www.keynote.co.uk.lib.exeter.ac.uk/market-report/retail/e-commerce-
internet-grocery-market?full_report=true Accessed November 11, 2015
Ocado Ltd, 2014. ‘Annual Reports and Accounts 2014’. [online] Available at:
http://www.ocadogroup.com/~/media/Files/O/Ocado-Group/annual-reports/ocado-
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Ocado Ltd, 2013. ‘Annual Reports and Accounts 2013’. [online] Available at:
http://www.ocadogroup.com/~/media/Files/O/Ocado-Group/annual-reports/ocado-
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Accessed November 11, 2015
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Palepu, K.G., Healy, P.M., Peek, E. (2013) Business Analysis and Valuation (IFRS
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