Ocado Retail’s profit squeezed

London — British online supermarket Ocado Retail warned it would not return to profit until the second half of its financial year as even its typically more affluent shoppers feel the squeeze from higher inflation and energy bills.

The business, a 50/50 joint venture between Ocado Group and Marks & Spencer, said on Tuesday its customers were cutting back on the number of items they buy and shopping less frequently, with rivals highlighting that more people are also choosing to buy in store rather than online.      

Ocado Retail forecast “mid-single digit” revenue growth for its 2022-2023 financial year, with core earnings likely negative in the first half but improving in the second for a “marginally positive” outcome over the full year.

Its shares were down 7% in morning trading on Tuesday, extending losses over the past year to 48%.

“We struggle to see how this performance is a strong endorsement of the Ocado business model around the world, given the UK is supposed to be the crown jewels,” said Shore Capital analyst Clive Black.

Ocado Group’s £6.7bn market capitalisation has been driven by technology partnership deals with overseas food retailers.

Online grocery in Britain more than doubled during the pandemic, peaking at 16% of the overall food retail market. Its share was 11.6% in December, according to researchers Kantar.

Ocado Retail said its sales rose 0.3% to £549.4m in its fourth quarter to November 27 and were up 15% over the five days before Christmas.

But the joint venture’s average basket value was down 1.3% in the quarter to £117, as a 7.6% rise in average selling prices was offset by a 8.3% fall in average items per basket.

Its average orders per week in the fourth quarter were 382,000, up 1.9% year on year.

That reflected 940,000 active customers at the end of the quarter, up 12.9% year on year, offset by reduced frequency in customer shopping.

Ocado Retail’s revenue was down 3.8% at £2.2bn for its full 2021-2022 year, with earnings before interest, taxes, depreciation, and amortisation forecast at close to break even, in line with guidance.

The opening of four new robotic warehouses, or Customer Fulfilment Centres (CFCs) as Ocado calls them, since the beginning of 2021 will ultimately bring total capacity for Ocado Retail to about 600,000 orders per week, underpinning revenue growth to £3.9bn.

While during the pandemic Ocado did not have enough capacity to meet consumer demand, it now has surplus capacity, which represents a cost to the business in the short term.

In November, Ocado Retail said it had “paused” the planned build of two new CFCs in the northwest and southeast of England, reflecting “a more prudent and disciplined approach to capacity rollout”.

Reuters