Ocado extends loss-making tradition

Online supermarket Ocado (OCDO)recaptured investors’ attention two years ago amid the surge in online food shopping – causing shares to shoot up by150 per cent from pre-pandemic levels. 

Since then, Ocado’s shareholders have grown disenchanted with its prospects, as supply issues and expansion costs weigh on the business. On top of this, the online supermarket is still making a habit of turning losses. The robo-warehousing and delivery company extended its multi-year run with a £177mn loss before tax over the 12 months to the end of November 2021. 

On top of this, the virtual supermarket is making a habit of turning losses. The robo-warehousing and delivery firm extended its four-year run with a £177mn loss before tax over the 12 months to the end of November 2021. 

Sales at Ocado’s UK retail grocery, which it owns jointly with Marks and Spencer (MKS), grew by a sluggish 4.6 per cent over the past 12 months to 28 November. Customer numbers rose by over a fifth and orders were up 12 per cent, but this was offset by shrinking basket sizes – with the average customer now spending £129 per order, close to the pre-pandemic average.

This is surprisingly slow growth for a grocer whose USP is its online offering, especially with the virtual channel rising to account for 12.5 per cent of total UK grocery sales, according to the latest figures from consultancy Kantar. Online shopping has fallen slightly from its peak, but is still almost double its pre-pandemic level, in which time Ocado’s share of the UK grocery market has remained below 2 per cent.

Tim Steiner, chief executive of Ocado Group, said that the past year has “further reinforced” that demand for online grocery is “here to stay”. The company says that growth in orders has been held back by a shortage of labour and wage inflation in the UK in the second half of the year, as well as a reduction in capacity caused by a fire at one of its centres in London.

Traditional bricks-and-mortar grocers have witnessed the fastest growth from the online shopping boom so far. Upmarket chain Waitrose has seen online sales rise by 188 per cent from an admittedly low base two years ago, according to figures from Jefferies. Meanwhile, Ocado’s mere 35 per cent growth over that same period makes it the “slowest growing” player among online UK grocers, according to the broker.

This could still play to Ocado’s advantage in the long run. Its UK solutions and logistics business, which partners with grocers including Morrison’s (MRW) and previously Waitrose to deliver more efficient warehousing and deliveries for online orders, currently accounts for a quarter of overall revenues and grew almost twice as fast as its retail sales in 2021. 

Ocado has been investing for growth here, revealing new robotic equipment this year that it claims will cut human labour time by a third. This investment should “support conversion” of more prospective grocer partnerships, resulting in a larger pipeline of orders over 2022, said broker Numis, which retained its ‘buy’ recommendation - we think this is unduly optimistic given the squeeze on profits from the expansion of its robotic warehouses abroad.

For now, Ocado’s shares are at a level only 14 per cent up on its pre-pandemic position, which perhaps underestimates the company’s ability to harness lasting changes to grocery shopping habits, but the jury is still out on the rate of change. Hold.

Last IC View: Hold, 2,025p, 6 Jul 2021