With its latest round of funding totalling £18m which closed in late November 2008, nine-year old online grocery delivery company Ocado has raised more money than any other European internet startup with total equity funds raised of £295.5 million, according to the TimesOnline. (Authors note: I plan to research and post in the near future he top 10 European startups by funds raised)
I like their logo...kind of reminds me of Wahanda
The real thing that caught my eye that one of the investors in this latest round was FMCG giant Procter & Gamble, maker of everything from Pringles and Pantene to Gillette and Ariel. P&G invested £5.0million in exchange for 1.0% of the company, valuing Ocado’s post-money equity at £500m - not bad for an unprofitable company that has lost close to £40m through the year-end September 2008, on sales of £288m.
Founded in November 1999 at the height of the dot com boom, Ocado also has over £100million of net debt on the books, which places a full enterprise value of the company at over £600m, for a trailing valuation multiple of over 2.0x Enterprise Value/Sales. From my investment banking days, this multiple seems on the high side for retailers, online or offline. In fact at the time of this post Amazon.com’s (AMZN) rough enterprise value to sales multiple is around 1.0x, so my initial outsider reaction is that Ocado achieved a fantastic valuation based on their latest historical sales figures.
Aside from the valuation paid by P&G and the other investor who made up the remainder of the round, this apparently marks the first time P&G has made an investment into a retail business. P&G’s rationale for the investment was that an investment in Ocado would be:
“a very fertile testing ground. We think Ocado is a huge research opportunity. They have a unique business and we can learn from it. We have not exactly worked out the research projects we will be looking at, but it will give us a better understanding of how people use the internet.”
In addition to this possibly being a vote of confidence in Ocado and the future of the UK online grocery/home delivery market, (especially in the face of fierce competition from the likes of Tesco, Sainsbury’s and others, including Waitrose who not only use Ocado but also have their owne home delivery business), I think its P&G’s way to fire a warning shot to its supply chain and its retail partners. In the past decade, retail consolidation has significantly increased the purchasing power and leverage that companies such as Wal-Mart/Asda, Carrefour, Tesco and others exercised over FMCGs such as P&G, Unilever and others. These retailers have also introduced high quality white-label products that compete with the big brands, and in some cases like at Marks & Spencer’s, they don’t even carry national brands at all.
Procter & Gamble's Stable of Consumer Brands
Although P&G claims in its quote to be planning on conducting as yet-to-be determined “research projects”, I am sure that the consumer insight and retail data they will gain from Ocado alone will justify the investment they have made. Companies like P&G used to get scanner data and weekly retail sales data from supermarkets and other retailers, but more and more retailers are following the lead of Wal-Mart and have stopped sharing retail data. Therefore consumer product companies like P&G have had to resort to other means to improve their point-of-sale intelligence, and have had to accept tightening margins and increased advertising budgets to continue to generate demand pull from consumers (but don;t get me wrong, I am not shedding a tear for P&G!).
Going direct to consumers is one way of cutting out the middleman, but in this case I think its more of a mechanism that P&G will use to keep its retail partners honest and a way to maintain its margin integrity. Without a credible channel, manufacturers like P&G do not have a credible threat against the growing dominance of the large and growing retail chains. It could not be out of the realm of possibility that P&G would open its own direct to consumer store selling all of its goods, much in the same way airlines and hotels starting selling direct to cut out and enforce better terms with its offline and online travel agency partners.
Back to Ocado for a second – their largest investor is John Lewis who owns Waitrose and there was mention that there is also partner conflict here as Ocado is possibly being prevented from working with other retail partners. In response to this, John Lewis has moved its investment in Ocado to its pension fund to allow Ocado to operate more freely, but I wonder now if Ocado will face similar supply & investor conflicts with P&G who surely will want better merchandising and terms over its fierce rivals such as Unilever and the like. The plot thickens!
