Why Amazon acquires Ocado

While Amazon is the king of the slide decks created by retail consultants today, Ocado is the heavy hitter in 2018. Landing three major deals this year (Sobeys, ICA and Kroger) and Casino in France at the end of 2017, means Ocado has moved from local to global rapidly. What is even more interesting is that Ocado seems to be finished with R&D and piloting, and is ready for scaling up and licensing. Investors seem to have noted that by valuing Ocado over 50 price-per-earnings, or three times value to sales. The value to sales metric, which is often used to value high-growth tech companies, is similar to Amazon's.

Speculation of Amazon acquiring Ocado has been on the palette for a long time, but with Amazon move to swallow Whole Foods Amazon's fresh food strategy seems to be set. Whole Foods gives Amazon access to a network of brick and mortar stores, customer base that visits a grocery store 1.5 times per week, entry into the fresh food business and potential of expanding Whole Foods into a network of distribution centers. Seems like a perfect match, so what could Ocado bring to the mix?

What is unique for the eCom business of Amazon is its high performance logistics. Amazon's internal delivery is clearly below $10, with excellent speed and customer experience. It should be easy to apply this for delivering groceries and enjoy further economics of scale. However, Amazon's experience is to deliver packages at bulk.

Grocery logistics is many times more complex than the less demanding cardboard boxes. Firstly collecting a grocery delivery is much more complex as one customer order typically includes over hundred items, products require temperature control and customer specific instructions require attention. Secondly the complete delivery chain must be temperature controlled from the warehouse to customers storage. And finally the grocery bag cannot be dumped at any time to the customers front door. Ocado has a well thought solution for all of these.

Amazon certainly acknowledges the issues, and is attempting to solve them for example with Amazon Key. The question now is whether they can solve them soon enough, or will Ocado's expansion eat the fresh food market before Amazon is ready. Ocado stock is now trading at just below 1,000 GBP with a market cap of 6.8B GBP, while it was a quarter of that before the Casino deal. But Amazon is not a company that is scared of spending money and now Ocado has access to four markets on top of their home market. Will we see Amazon swallowing Ocado this year?