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  • A Bet on How Future Groceries Will Be Bagged
    Bloomberg

    A Bet on How Future Groceries Will Be Bagged

    (Bloomberg Opinion) -- Ocado Group Plc, the British online grocer that’s morphed into a technology company, has always been a jam tomorrow stock. Now it’s asking shareholders to wait not just for the jam but the full afternoon tea.The specialist in automating how supermarket orders are filled on Tuesday announced that its 2019 pre-tax loss jumped to 214.5 million pounds ($277 million), from a loss of 44.4 million pounds a year earlier. Part of this was due to a damaging fire at its Andover warehouse almost exactly a year ago, which was unfortunate but Ocado has coped well with the disruption.What’s more worrying for investors is the impact of investment in its burgeoning international division, which has been striking deals to operate the online grocery businesses of chains from the U.S. to France and Japan. While that’s a credit to Chief Executive Officer Tim Steiner, who has been knocking on retailers’ doors for the the past five years, it means Ocado has an awful lot to do — and pay for. Ocado’s international technology arm could be more lucrative in the future, but for now, it’s a drain on capital. Consequently, Ocado said expenditure would more than double this year to 600 million pounds. Take away the impact of the warehouse fire, and that leaves a balance of just over 500 million pounds for building state-of-the-art warehouses that are fully equipped to pack grocery orders with limited need for humans.The majority of this will be spent on getting its automated warehouses up and running for international customers, including Casino Guichard Perrachon SA in France, Canada’s Sobeys Inc. and the U.S. chain operator Kroger Co. Some of the expenditure will be offset by expected fees from its international clients of more than 100 million pounds, but most of it is a down payment on future income once the systems are fully up and running. That doesn’t leave much scope for any unexpected hiccups in the meantime.Until those warehouses are open, Ocado cannot recognize the international revenue, but it must incur the costs. That showed in its 2019 results. Ocado invoiced fees of 81.4 million pounds to its international partners, an increase of almost 40%. But revenue from this arm was less than 1 million pounds, while it made a loss before interest, tax, depreciation and amortization of 62.1 million pounds. For this year, Ocado forecasts international revenue of less than 10 million pounds. Warehouses for Casino and Sobeys will be open for only part of the period. In the meantime, Ocado must continue its heavy spending. It had 751 million pounds in the bank at the year end, thanks to its deal to sell half of its U.K. retail business to Marks & Spencer Group Plc. It also raised 600 million pounds through a convertible bond issue after the year end. The company says this gives it plenty of headroom. But with such an investment burden over the next few years — it has also signed a deal with Aeon Co. in Japan — further calls on shareholders can’t be ruled out.And let’s not forget challenges closer to home. In September, M&S will replace Waitrose as Ocado’s supplier for its U.K. online supermarket, a massive changeover with huge execution risk.For now, investors appear confident that once the different warehouses are operational the fees will start to flow into profit and cash flow. The shares have risen by a third in the past year. Ocado’s enterprise value is currently just over 4 times forward sales, even ahead of Amazon.com Inc., on just over 3 times.This looks divorced from the reality of both Ocado’s spending needs, and the long haul to generate a return on its investment.To contact the author of this story: Andrea Felsted at afelsted@bloomberg.netTo contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.netThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

  • French, Italian Economies Shrink in Blow to Europe’s Recovery
    Bloomberg

    French, Italian Economies Shrink in Blow to Europe’s Recovery

    (Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. The French and Italian economies unexpectedly shrank at the end of 2019, casting a shadow over expectations the euro area was on a firmer footing.France’s strike-ridden economy contracted 0.1% amid a decline in exports and a huge drag from companies using up stocks rather than increasing production. Italy’s GDP fell 0.3%, the most in almost seven years.Neighboring Spain fared significantly better at the end of last year, reinforcing its position as one of Europe’s outperformers. Faster-than-anticipated growth of 0.5% was driven by buoyant exports and a strong increase in services.France’s unexpected contraction is a sting for Macron, who’s already facing mass protests and strikes against his pension reforms, and which have disrupted household spending. His government has repeatedly pointed to France’s relative strength in Europe as a sign his reforms of taxes and labor laws are working.Finance Minister Bruno Le Maire blamed the poor results on disruptions in ports, the rail network and fuel deposits and highlighted resilient consumption and business investment.“This temporary slowdown does not call into question the fundamentals of French growth, which are solid,” he told reporters in a statement. “We are nonetheless particularly vigilant of international uncertainties.”Consumer spending contracted 0.3% in December, when the impact of the strikes was the most acute. Households cut back on expenditures for clothes, home furnishings and food, statistics from Insee showed.On a quarterly basis, household consumption and business investment recorded their weakest performance of the year.What Bloomberg’s Economists Say“Our central scenario is for growth to rebound to 0.3% in 1Q before increasing to 0.4% from the following quarter. But the risks are tilted to the downside.”\-- Maeva Cousin. Read the FRANCE REACTFrance’s slump takes away from the more upbeat mood emerging about Europe recently. Surveys have suggested that the rot has been stemmed for now, and growth in the region could improve in 2020.The European Central Bank has already been striking a more positive tone, highlighting that risks to the outlook have become “less pronounced.” More signs of improving momentum came Thursday when the European Commission reported a marked rise in sentiment in January, led by manufacturing and construction.There’s still plenty that could test the European economy’s resilience.Trade risks have returned to the fore with the U.S. renewing threats last week to raise duties on imports of cars from the EU, and France only narrowly avoiding American tariffs on wine and cheese in a dispute over digital taxation. New risks are also emerging, notably including how much the spread of the deadly coronavirus drags on the Chinese and global economies.French cognac maker Remy Cointreau has already sounded a note of caution over the impact of the virus on its business in China. The company ditched its guidance for the year.At home, French companies are also facing headwinds from prolonged transport strikes. Retailer Casino Guichard Perrachon SA pointed to the disruption as a reason for cutting its profit forecast earlier in January, and the tourism sector is also expected to suffer.GDP figures for the whole of the euro area will be published later Friday. Economists expect growth to have slowed to 0.2% in the fourth quarter.In the U.S., the economy grew at a 2.1% annualized pace in the fourth quarter, matching the previous period, though consumer spending growth weakened and business investment declined.\--With assistance from Barbara Sladkowska, Zoe Schneeweiss, Giovanni Salzano and John Follain.To contact the reporter on this story: William Horobin in Paris at whorobin@bloomberg.netTo contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana RandowFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

  • European Manufacturers Shake Off Some of Their 2019 Gloom
    Bloomberg

    European Manufacturers Shake Off Some of Their 2019 Gloom

    (Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. Europe’s manufacturers started the new year on an upbeat note, the latest sign that the uncertainty that’s shrouded the sector and the region’s economy more broadly has lifted somewhat in recent weeks.The headwinds that pummeled European industry into its worst slump in seven years have eased recently. A U.S.-China deal has brought at least a pause in the trade war between the world’s two largest economies, and Brexit negotiations appear to be on track. Those incipient signs of progress have generated optimism among investors, policy makers at the European Central Bank as well as some business executives that growth momentum will pick up. They all warn, however, that many risks remain.The European Commission said on Thursday its economic sentiment index for the euro area rose “markedly” in January to 102.8 from a revised 101.3. Economists in a Bloomberg survey had been expecting only a slight up-tick from December.The euro, which rose earlier after stronger than expected German state inflation, remained slightly higher against the dollar. At 11:07 a.m. Frankfurt time, it was at $1.1019.The rise in confidence was particularly strong in Germany and France, and generally led by manufacturing and construction. In the euro area, industry managers were more optimistic about the outlook for production and, to a lesser extent, demand from customers.The outlook in services dimmed somewhat, and consumers have yet to be convinced that better times are ahead. Their view of the economy in the coming 12 months dropped to the lowest since 2013.In a separate report, Eurostat said euro-area unemployment dipped slightly at the end of 2019. At 7.4%, the jobless rate is now at the lowest since 2008.Mixed BagThe findings on Thursday are the latest in what’s been a mixed bag of data in recent weeks.A survey of purchasing managers in Germany has pointed to a stronger-than-forecast improvement in the country’s beleaguered manufacturing sector, even if it’s still contracting, and a closely watched confidence index improved for a fourth month. Yet strains have appeared on the labor market, and services and construction slowed at the start of the year.The French economy has held up reasonably well even though strikes and protests over President Emmanuel Macron’s planned pension reforms have weighed on consumer spending. Supermarket operator Casino Guichard Perrachon SA has already slashed its forecast for full-year operating profit in France.Elsewhere in the region, confidence fell slightly in Italy and more notably in Spain.What Bloomberg’s Economists Say“The latest indicators point to stronger momentum. Trade tensions are easing, risks posed by Brexit have diminished and policy uncertainty has receded. That will put a floor under growth this year.”\-- Jamie Rush, chief European economist. Read the EURO-AREA PREVIEWSince ECB President Christine Lagarde said last week that downside risks to the euro-area economy have become less pronounced, some new threats have appeared. The new coronavirus is taking a toll on business as airlines including Lufthansa cut flights, and companies such as Finnish elevator-maker Kone expect a hit on bottom lines amid factory closures. Trade disagreements between the U.S. and Europe could also flare up again.Despite the hurdles, the International Monetary Fund sees euro-area growth momentum picking up. The Washington-based lender updated its outlook last week, predicting the region’s rate of expansion will accelerate to 1.4% in 2021 from 1.2% last year.Eurostat will publish its first estimate for the fourth quarter on Friday.(Updates with euro in fourth paragraph.)\--With assistance from Harumi Ichikura and Kristian Siedenburg.To contact the reporter on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.netTo contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana RandowFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

  • Reuters

    Investors build war chests to buy bonds of distressed European companies

    Years into a bond market bull-run, investors are banking on a brighter future for funds that buy the debt of financially troubled European companies whose bonds are offering meatier returns because they are more risky. With European economic growth expected to be subdued in 2020, and default rates tipped to rise, investors expect an increase in the number of companies that will struggle to service their debt. Private equity groups and asset managers are creating so-called special situation funds to identify suitable targets for these high-risk - and potentially high-reward - bets.