How Ocado tycoons made a mint

 

Online grocer Ocado has won plaudits for service but it's also attacted controvery and criticism ever since its launch in 2000, writes Ruth Sunderland in a City Focus.

Ocado delivery van

Reputation: Ocado is a pioneer of online shopping and has won accolades for service

Like the Boden catalogue, Pilates classes and honey-blonde highlights, the weekly Ocado delivery is a must-have for the affluent urban tribe of yummy mummies.

The online grocer's vans are an emblem of middle class aspiration as they chug around the leafy suburbs, in a childlike palette of bright colours.

But behind the wholesome veneer, City critics are asking uncomfortable questions about what is really going on at Ocado, whose shares have recently lost a third of their value.

The company has cultivated an image for selling high quality foodstuffs while caring for the environment because customers don't need to drive to a store.

Scratch the surface, though and the Ocado story involves former Goldman Sachs bankers making millions, reclusive tycoons, secretive offshore trusts and a business that has yet to turn an annual profit.

Ocado is undoubtedly a pioneer of online grocery shopping and has won awards for its service. Customers order online before goods are gathered in a huge warehouse in Hertfordshire ready for delivery.

By contrast, rivals such as Tesco began its internet service by picking goods from store shelves, meaning items were sometimes out of stock.

Tesco is now getting its act together with its own Ocado-style warehouses. Wm Morrison paid £70m for Kiddicare to enable access to online retail and Marks & Spencer has hired Tesco's former internet hotshot Laura Wade-Gery. Waitrose, too, is revamping its online grocery business.

While all this would be enough to perturb investors, the latest plunge in the Ocado share price has set alarm bells ringing.

At 6pm on Friday February 18, after the stock market closed, the Steiner 2008 Millennium Trust, based in Nassau, announced it had sold £5m of shares.

The beneficiaries of that trust, which disposed of 2m shares at 254.1p each, are Ocado's chief executive Tim Steiner and his family.

There is no suggestion that Steiner has broken any rules and he says he still holds a 5% stake directly and another 2% through a long term incentive scheme. Still, announcing the sale at an hour likely to attract the minimum of attention was bound to raise eyebrows.

Steiner says: 'It is a blind trust - I don't control it. The trustee lives in the Bahamas and he gets to work at 10am, which is 3pm here. We put out a release in 30 minutes. Any suggestion we were trying to bury it, the whole idea is preposterous.'

The timing of the sale turned out to be remarkably fortunate, for the following Monday £100m was wiped off the company's market value after Waitrose, its main supplier, announced plans to ramp up its own online business.

Controversy and criticism is nothing new for Ocado.

It has attracted both since it was founded back in 2000 by three former Goldman Sachs bankers, who at that time were barely into their thirties and had no experience of food retailing.

There, Steiner was reunited with Jonathan Faiman, a friend since nursery school who joined Goldman in 1995. Like Steiner, Faiman held Ocado shares in an offshore trust, Zurich-based Tempest Capital. He quit the firm a year ago and has moved abroad.

The third musketeer is Jason Gissing, also from a privileged background, who went to Oundle public school then Oxford. Gissing's offshore vehicle, the Trident Trust Co, is registered in the British Virgin Islands. He stepped down as finance supremo in September 2009 to become 'director of people, culture and communications'.

Ocado's Tim Steiner, Jason Gissing, Jonathan Fairman

Origins: Ocado was founded by three Goldman Sachs bankers who had no experience of food retailing

The three shopping novices were not in for an easy ride.

Sir Terry Leahy, the respected former Tesco boss, made no secret of his doubts about an upstart business set up by inexperienced youngsters in the early noughties, when the dotcom fever was at its height.

The intrepid trio did, however, attract some heavyweight investors, including reclusive Swedish tycoon Jorn Rausing, a multi-billionaire member of the family that invented Tetra-Pak.

He sits on the board and holds a stake through a vehicle called the Apple Trust.

The Ocado Boys' former boss, Michael Sherwood, co-head of Goldman Sachs' London operation, has a personal holding. Other shareholders are former US president Al Gore's investment fund and financier Nick Roditi, a multi-millionaire who used to run investments for legendary hedge fund guru George Soros.

Their most significant backer, however, was Middle England's favourite department store John Lewis.

Back in 2000, Charlie Mayfield, now chairman of the John Lewis Partnership, struck a deal to take a 40% stake in Ocado, again held through an offshore vehicle, and for Waitrose to act as the firm's supplier.

In 2008, the store chain passed its holding into the ownership of its company pension fund, which has now sold its entire holding, in the wake of Ocado's controversial stock market float last year.

Ambitious plans were drawn up for the float in the summer with the help of Goldman Sachs, under the code-name Project Titan. At that point, the business had been running for a decade without ever making a profit and was forced to list no fewer than 18 pages of 'risk factors' to investors in its share prospectus.

This did not stop the founders aiming for a float value of more than £1bn, in the depths of an economic slump. In the event, it did not quite go as planned.

They were forced to cut the price to 180p a share - way below the hoped for 200p to 275p. Yesterday they closed down another 2% at 202p.

Indeed, the Steiner 2008 Millennium Trust, which had said it might sell 2m shares at the float, didn't bother and, as we now know, waited for a better moment.

Faiman's trust sold up to 3m shares and Gissing's up to 1.9m. The John Lewis pension fund offloaded its last chunk of shares last month in a deal handled, inevitably, by Goldman.

Steiner says the sale simplifies Ocado's relationship with John Lewis - but Waitrose still plays the dual role of supplier and rival. But without a bricks and mortar supermarket chain of its own, Ocado is uncomfortably dependent on Waitrose - which has just invested £10m in its online grocery business and is rolling out a new website.

Ocado has finally broken into the black with a profit of £300,000 in the final quarter of 2010, though it still made a £12.2m loss for the year as a whole. It has also earmarked hundreds of millions of pounds to expand its warehouses and will need impressive sales to recoup these costs.

Steiner says he's unconcerned about the competition. 'Every single retailer, from petfood to jeans, is talking about expanding online.

'Does it concern us? Absolutely not. We have a nine-year lead, the market will grow and there is space for everyone.'

Whatever the future may hold for Ocado, it has already been a lucrative venture for some. John Lewis has made £210m from its investment. Goldman Sachs has earned handsome fees along the way and the Ocado Boys themselves have attained multi-millionaire status.

The founders of this quintessentially middle class grocer may yet prove the naysayers wrong.

But at this point there are plenty who would agree with one prominent critic, the influential City analyst Philip Dorgan. His verdict? 'Ocado starts with an "o", ends with an "o" and is worth zero.'

The Ocado Founders
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