Very few UK stocks are targeting global domination but that is the ambition driving the Ocado (OCDO) story.

The Covid-19 pandemic has shifted the market in its favour, with a significant jump in people around the world shopping for groceries online. This behaviour is likely to accelerate investment by supermarkets in their online fulfilment capabilities.

A joint venture with Marks & Spencer (MKS) provides a nice income stream to Ocado but the latter is fundamentally a robotics and automation business rather than a delivery company.

It licences systems to grocery companies to power their fulfilment centres, essentially large warehouses where a lot of the picking is done by robots.

To date Ocado has signed up seven supermarkets outside the UK as partners including names in the US and Japan, where growth opportunities are massive. Two partners, Sobeys in Canada and Casino in France, now have operational centres.

In the US, Kroger will launch its first centre using Ocado technology in 2021 and has big plans to add more automated warehouses. It is also paying Ocado to improve the efficiency of picking goods in-store for click and collect orders.

Ocado typically incurs £20 million to £30 million cost for the technology hardware and software for each warehouse, while each supermarket partner pays for construction of the property. Ocado gets a cut of sales from each warehouse.

In August, broker Peel Hunt said: ‘Ocado’s deals to date add up to £210 billion in gross sales, which is 7.5% of its £2.8 trillion key markets. Ocado believes it could hit 25% market share, as the market leader, and over time 75% to 80% could go online. As it takes a 5% fee as its revenue, this turns into an annual revenue stream of £26 billion+.’

Future initiatives could see Ocado play a role with robotic preparation of ready meals or salads and it has invested in a business involved in vertical farming, which is shelving to grow herbs, salad, fruit and vegetables. That could see fresh produce grown next door to a supermarket.

The company is not forecast to make a profit in the next two years as it will take time to get partners’ operations up and running. As such, investing in Ocado means taking a longer-term view of the opportunity.

Risks include competition, although Ocado is off to a strong start in its bid to be a market leader, and legal action being pursued by Norway’s AutoStore over robot technology patents. Ocado has issued a strong rebuttal but it’s worth monitoring the situation.

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