Ocado overtook Tesco as the most valuable food retailer on the UK stock market for the first time this week, in a sign of the changing dynamics in the grocery market.
The online group that former Tesco chief executive, Terry Leahy, reportedly once described as a “charity” because of its cumulative losses, was worth £21.7bn against Tesco’s £21.1bn at the end of trading on Tuesday.
Both retailers’ share prices fell on Wednesday, with Ocado suffering a steeper decline of about 5 per cent, compared with just over 1 per cent at Tesco. That brought Ocado’s market value back down to £20.5bn, fractionally behind Tesco’s £20.8bn.
Tesco is still by far the largest supermarket in the UK, dwarfing its online rival in terms of sales, profits and cash flow. Its dividend payments alone last year were not far short of all the operating cash flow generated by Ocado in the past decade.
Almost all of Ocado’s share price gains have come in the past two years, as it began to attract more customers for its technology and efficiency. An agreement with Kroger in May 2018, the largest food retailer in the US, was a notable turning point; Ocado’s shares have risen fivefold since it was announced.
This year the shares have doubled as Covid-19 prompted many more people worldwide to try online grocery shopping for the first time and retailers redoubled efforts to establish or expand ecommerce services.
Ocado is building more than 50 automated order-picking warehouses worldwide that will eventually generate royalty revenues based on capacity. The first such centre opened near Paris this year, more than two years after Ocado and French supermarket Monoprix signed an agreement to build it.
Many investors regard Ocado as a technology stock rather than a retailer.
This is certainly the view of Tesco, which removed Ocado from a comparator group of companies used to determine executive bonuses because its share price growth was “correlated to the sales of its technology platform as opposed to its food business”.
But the stock remains a constituent of the food and drug retail sub-index, where its share price performance continues to contrast sharply with that of traditional supermarkets.
Their stock received no boost from the pandemic despite the share of food eaten at home increasing after the UK’s pubs and restaurants were ordered to close.
At around 215p, Tesco’s own shares are little changed from the day when Dave Lewis arrived as chief executive in 2014, despite a widely-praised turnround in the retailer’s fortunes since then. Mr Lewis is retiring from the company on Wednesday.
Ocado’s performance since the start of 2018 has eclipsed even that of some US tech “disrupters”; its 630 per cent share price rise is greater than the 575 per cent managed by Tesla or the 150 per cent of Netflix.
However, the electric carmaker’s valuation relative to peers is more extreme — its capitalisation is more than twice that of General Motors, Ford and Fiat Chrysler combined.
Before long, Ocado too could be worth as much as its quoted rivals — Tesco, J Sainsbury and Wm Morrison — put together, because Tesco’s market value is likely to shrink further when it distributes £5bn of cash from the sale of its Asian business to its shareholders.
Index compiler FTSE Russell said its indices were based on International Classification Benchmark rules, which placed companies according to their “primary revenue driver”. Accounting rules mean Ocado cannot book royalty revenues until the facilities that generate them are operational.