Ocado shares have been weak recently on concerns it could be hit if Amazon’s new grocery service takes off.
They are currently 4% higher at 232.3p, but analysts at Societe General still believe Ocado, along with Tesco, has the most to lose from the competitive threat of AmazonFresh. Putting sell recommendations on both businesses, they said:
They are players we think are most at risk (strong presence in the London area) if AmazonFresh is successful in the UK.
J. Sainsbury (hold) is not immune to the Amazon threat but its strong differentiation (high quality products, well-recognised private label) could help protect the business. As regards Morrisons (sell), we see a potential risk of cannibalisation of morrisons.com given the wholesale agreement signed with Amazon.
Of course there has been much speculation Ocado could be a takeover target, not least for Amazon. But Societe Generale are unconvinced. Running through the possible predators, it said:
In the UK online food market, the key question is whether Ocado could become a potential acquisition candidate for the other food retailers. We think Tesco and Sainsbury’s are unlikely to acquire Ocado. With 2015 online food sales of £2.9bn and £1.0bn, respectively, according to our estimates, both groups have successfully developed their online activities.
For Morrisons, we think that an acquisition is unlikely as well despite the logistics agreement that is already in place with Ocado. We see two potential obstacles: 1) This would be a significant investment for Morrisons. Ocado’s market capitalisation currently stands at £1.3bn (vs £4.1bn for Morrisons); 2) There is a significant gap in terms of valuation. Ocado is currently trading at 1.1x of 2016e sales vs 0.36x for Morrisons. Such an acquisition could be difficult to justify.
An acquisition by Asda/Wal-Mart is not impossible if Wal-Mart really wants to acquire Ocado’s proprietary technology and use it in its other countries. The US giant already acquired an online grocery pure player in China, i.e. Yihaodian. Note, however, that the short-term priority for Wal-Mart is probably to turn around Asda (appointment of Sean Clarke as new CEO in place of Andy Clarke).
Could Ocado become an acquisition candidate for Amazon? In the short term, we think Amazon will try to accelerate its online food development organically. Amazon has solved the issue of sourcing fresh products thanks to its wholesale agreement with Morrisons. We think Amazon could become interested by Ocado if it ran into difficulties in the efficient preparation of orders and delivery. If this was the case, Amazon could become interested in Ocado’s proprietary technologies.
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