Ocado, I&L and the FTSE 100

In the latest reshuffle of the FTSE 100, Ocado was elevated to the index, after its share price nearly quadrupled in the past 12 months. It is currently valued at £7 billion, although its sales are just £1.5 billion and it made a pre-tax loss of £0.6 million last year.

This share price surge was the result of Ocado signing various deals to sell its online technology to retail companies around the world, including Kroger, the second largest food retailer in the US. These online deals show the desire of global grocers to be ready to compete with the online entrants and to meet changing customer demands.

Market valuations reflect ecommerce potential

Similar to Ocado, the online retailer Asos has been in existence for 18 years and is now worth £5.5bn. However, Asos is more profitable, producing pre-tax profits of £80 million on revenue of £1.9 billion last year.

Of course, stock market investors focus on future, not current cash flows, but nevertheless this suggests significant growth in both sales and profits is required to justify the valuations of both Asos and Ocado.

There are existing retailers with online strategies that are already producing healthy financial results, and which still have higher valuations. Next, for example, is valued at £8.6bn on sales of £4 billion and profits of £789 million. Its shares are up 36% this year.

Therefore, Ocado and Asos sit between Next and M&S, which is now valued at £4.7 billion, despite reporting sales of £10.7 billion and adjusted profits of £581m for the last financial year. It is also number 2 in UK online clothing retail, with a c.6% market share.

What does this suggest for ecommerce-driven logistics demand?

The direct impact of ecommerce growth on warehouse demand is firmly established in the UK, but it is already having an effect on European logistics markets too. Ecommerce accounted for c.18% of industrial and logistics take-up in the UK in 2017 and c.35% in the 1Q of 2018. Most European markets saw ecommerce demand make up 10-20% of take-up last year. However, in Italy it was 24% and in Spain reached over 40%.

If we take a longer-term perspective it is clear that the growth of ecommerce has had a marked impact on development of both retail and logistics space in the last decade. While online sales in Europe have nearly trebled in the past nine years, total retail sales have fallen 4%, so retail space has expanded by just 2% since 2009. Logistics space, by contrast, has increased 60%.

Ecommerce penetration rates in Western Europe are still relatively low (c.9% on average, versus 16% in UK). However, internet sales are forecast to continuing growing strongly. Therefore, the expectation is that ecommerce will continue to account for a significant proportion of logistics take-up for years to come. The knock-on effect is expected to be potentially higher rental rates, as supply fails to keep pace and vacancy contracts. This is the trend we have already seen play out in the UK and U.S.

By Mark Cartlich, Senior Director, EMEA Industrial & Logistics, Capital Markets, CBRE.