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Monday, 26 June 2017

Ocado, Tesco and Amazon

The start of a big push by Amazon to become the prime supplier of food to retail American customers is beginning to unsettle UK stock markets. Already one hedge fund based in the US has bought a block of Tesco shares, to hold alongside their block of Amazon shares. They intend to sell the Tesco shares when their price has begun to go down, short-selling to help precipitate a price collapse in Tesco shares. They expect such a collapse to be more than offset by a rise in Amazon shares in the UK when stock-pickers expect the UK to become an early target for the expansion of Mr Bezos's global expansion.

The coming months will see increasing 'volatility' in the share prices of the different supermarkets as their presumed resilience in the face a possible launch of Amazon in the UK food market is evaluated. Sainsbury's has assimilated Argos and is now trying to buy the wholesale distributor to a large number of convenience stores, to maximise their spread across the retail market. Tesco has taken similar action in the takeover of Booker. Morrison has been working hard to made up for a slow start in the online market, but now faces a huge dilemma. Waitrose and Morrisons have both put part of their retail home-delivery service into Ocado, which looks a sitting duck for Amazon either to assimilate [in which case  Waitrose and Morrisons would be pushed out] or to wipe off the floor.

I do not myself think that Amazon will consider a takeover of the eternally-lossmaking Ocado operation. Ever since it was established I thought the Ocado business model was 'too clever by half', and I have watched in amazement as year after year investors piled in to add to the capital input that has never produced a significant output. The management of Ocado have repeatedly said that their business model and their software were sure to be taken on by foreign firms; and that has not happened. The development of online markets and the related software have developed so fast all round the world that a quaint British experiment never had a chance of becoming a global leader.

The coming months will see rumours and counter-rumours about what Amazon intends, and how it would go about it if the giant vampire squid of the bookselling world does decide to target the UK food sector as the next big opportunity. If they do so decide, the impact on Ocado will be terminal. The effect on some other supermarkets may be less than some stockpickers will expect: Morrisons has a largely regional and class-based clientele, Waitrose and Sainsbury's have their own special niches as well as now a broad spectrum of goods on offer at Sainsbury's; and the John Lewis envelope will largely protect Waitrose. That leave Asda and Tesco as the most vulnerable, alongside the Co-op [which also has it own loyal customers and regional strengths]. Hence Tesco has been the number one target. How both sides - the UK supermarkets and stock-market speculators - behave in the coming months will be fascinating to behold.

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