market folly

We're posting notes from the London Value Investor Conference 2016.  Next up is Dan Abrahams of Alfreton Capital who pitched long Ocado.


Dan Abrahams London Value Investor Conference Presentation

Alfreton Capital is a European focused value investor that runs concentrated portfolios with long holding periods.

Investment idea: Long Ocado 

Ocado is a popular short with long short funds. It trades on a P/E of over 100x and does not have significant market share at present.

Abrahams likes self-reinforcing virtuous circle business models.  Over the last 30 years supermarkets grew at 22% per year. Ocado can experience the same kind of growth. They already have the leading customer proposition in the British grocery sector. Over 50% of people order their groceries from Ocado using a smart phone. It takes on average about 3 minutes to make the order.  Ocado offers a price guarantee to customers and delivers the shopping directly to their door.

In terms of freshness Ocado has the shortest supply chain. It can get the food from the farm to customer’s house quicker than a supermarket. It offers twice as much choice as the largest supermarket. It does all this with industry leading margins.

Can Ocado’s model be replicated? Abrahams thinks not because the weekly grocery shop consists of on average 50 items that need to be treated in different ways – frozen, chilled and ambient. The packing needs to be done carefully so as not to squash items. Ocado has adopted a unique approach to picking using automation and robotics. The existing supermarkets have to send workers out to pick individual online orders off the shelves. The inefficiency of their approach means that they make a loss on online orders. 

Can Ocado compete against Amazon? Amazon is rolling out Amazon Fresh in the US and will probably do the same in the UK soon. The bricks and mortar supermarkets are likely to lose out to Amazon just as books and electronics retailers already have. Amazon’s entry into the food sector is an opportunity for Ocado. Ocado can sell their technology to Amazon. Morrisson’s are already partnering with Ocado. Alfreton Capital’s research indicates that Ocado have the only solution to online grocery shopping.

Ocado’s CEO and CFO have large shareholdings in the business so are aligned with other shareholders. Grocery is the largest retail category – double the size of everything else. There is plenty of room for Ocado to grow as customers move online.


Be sure to check out the rest of the presentations from the London Value Investor Conference.