Goldman Sachs sells Sainsbury and buys Ocado over Amazon Fresh food launch
Goldman Sachs said the sell-off in Ocado shares has been an unwarranted over-reaction to news that Amazon is planning to launch its Fresh food offering in the UK, as it will be worse news for bricks-and-mortar grocers.
Goldman retained its 'buy' rating on Ocado and 'sell' on Sainsbury, which it said would be most affected due to its focus on the South East.
Since The Times reported in mid July that Amazon Fresh is planning to launch in the UK, Ocado has underperformed the UK grocers circa 18%, with no other real news affecting the company in this time.
"Though there has been no official announcement by Amazon, this has been the subject of many investor questions. With this note, we highlight what we consider to be the relevant points behind our view that Ocado’s recent share price reaction is unwarranted," Goldman said.
If Amazon Fresh were to launch and significantly disrupt the UK grocery market it would exacerbate problems for store-based competitors
"Mainly, we believe the entrance of Amazon Fresh in the UK would be positive for Ocado, but very negative for its store based competitors."
Logicor has since reported that Amazon has signed a 10-year lease on a former Tesco warehouse in Surrey, which trade publication Retail Week said was "the clearest indication yet" that Britain will see the first expansion of Amazon Fresh, which currently serves Seattle, Los Angeles, San Francisco, San Diego and New York City.
But Goldman Sachs' research revealed that Amazon "does not tend to dominate" when it enters established online food retail market, such as the UK's, with Ocado in particular already having in place "the most capital efficient, low-cost food retail model in the UK".
"If Amazon Fresh were to launch and significantly disrupt the UK grocery market it would accelerate growth of the online channel, and exacerbate problems for store-based competitors."
A London-focused launch for Amazon's food offering would be most disruptive to South-East focused Sainsbury's, in the GS view, with 9% of its UK supermarkets and 26% of its convenience stores located in London versus 3% and 11% for Tesco.
In a worst-case sort of scenario, analysts extrapolated that if Amazon Fresh’s entry was to precipitate a similar margin fall as seen at electronic retailer Best Buy in the US, it could take "60%-90% from the valuation of Morrisons, Sainsbury and Tesco".
But for Ocado's longer term prospects, expansion by Amazon of the Fresh brand outside of the US would even be likely to be a catalyst for Ocado’s Smart Platform online grocery solution, Goldman suggested, which could lead to the first big overseas deal that the company has long been chasing.
"We think this will become an increasing focus for food retailers globally as Amazon expands into grocery."