UPDATE 3-Ocado hopes new depot model will attract foreign partners

Tue Jul 1, 2014 6:15am EDT

* To spend 80 mln stg on 3rd depot in Andover, south England

* Says modular, scalable depot could attract more partners

* H1 underlying pretax profit 7.5 mln stg

* Shares down 4.9 percent (Adds latest IGD forecast, paragraph 3)

By James Davey

LONDON, July 1 (Reuters) - British online grocer Ocado will start building a third major distribution centre this year, it said on Tuesday, hoping the smaller design will provide a model for partnership deals with overseas retailers.

Ocado, which signed its first third-party deal with Britain's No. 4 grocer Morrisons last year, also reported a first-half profit, putting it on track to make its first annual pretax profit this year.

Britain's online grocery market is growing at around 15 percent a year, far outpacing the broader market, and while it still accounts for only about 5 percent of total grocery sales, industry group IGD sees it more than doubling in value over the next five years to 17 billion pounds ($28.93 billion).

Despite the rapid growth, however, Ocado has struggled to make a profit due to the costs and complexity of delivering perishable goods to customers' doors, and some industry analysts think partnership deals with foreign retailers could be an important way for the firm to prosper in future.

Ocado said it had secured a site for a so-called customer fulfillment centre (CFC) in Andover, southern England, that will have a capacity of 65,000 orders per week - about one third of the capacity of its second CFC at Dordon, central England.

Building works are expected to start in the fourth quarter of 2014, with the site opening for Ocado's sole use at the end of 2015. Investment in the project will total 80 million pounds.

Chief Executive Tim Steiner said the investment would show Ocado could build CFCs that were "modular and scalable," putting it in a strong position to attract partners elsewhere in the world, where online grocery shopping is less well established.

Some sector analysts remain to be convinced, however.

"It is unclear to us that this provides the capex-light solution which is needed in order to strengthen the appeal to international partners," said analysts at Jefferies.

At 0900 GMT, Ocado shares were down 4.9 percent at 353.4 pence, valuing the business at about 2.1 billion pounds.

MAKING A PROFIT

Ocado, whose range includes products supplied by upmarket grocer Waitrose, said it made a profit before tax and one off items of 7.5 million pounds in the 24 weeks to May 18, its fiscal first half, compared with a loss of 1.0 million pounds in the same period last year.

Gross sales rose 15.6 percent to 442.4 million pounds, having been up 18 percent in the first quarter, a slowdown Steiner attributed to "subdued and cautious consumer spending".

Ocado said its retail business would continue growing broadly in line with, or slightly ahead of, the online grocery market. It has not made an annual pretax profit since it was founded in 2000 but analysts are forecasting one of about 16 million pounds for its 2013-14 financial year.

Britain's traditional supermarkets are seeing little, if any, growth in sales at their big stores, leading to a pick up in competition in online sales. Market leader Tesco recently cut the delivery price for its online grocery orders.

Though Ocado's share price is down 16 percent over the last six months, it is still up 24 percent over the last year, mainly on the back of a 200 million pound deal with Morrisons to provide its online grocery operation and on hopes it could do similar deals overseas.

The Jefferies analysts, who have a "hold" rating on Ocado stock, said the shares looked fully valued. They reckon investors are pricing in an option value for international expansion of about 500 million pounds with the remaining 1.9 billion pounds of economic value reflecting broadly static market share in a strongly growing UK online food market.

In the first half, Ocado's active customers increased to 396,000 from 360,000, though average basket size dipped slightly to 114.43 pounds from 114.90 pounds.

Ocado said the Morrisons.com service successfully launched in January and was ramping up in line with expectations.

($1 = 0.5877 British Pounds) ($1 = 0.5877 British Pounds) (Editing by Paul Sandle and Mark Potter)