After Ocado swung to a £500m annual loss, any momentum it built up over the last few years has all but vanished.

The food etailer-turned-tech-provider is caught between an underperforming domestic joint venture with Marks & Spencer and its international Solutions arm, which provides its tech platform to third parties and continues to add to an impressive list of international clients, despite burning through cash.

Ocado says its domestic arm’s struggles can mostly be laid at the feet of global and macroeconomic travails: spiking inflation; plummeting consumer confidence; and a more general shift away from online retailers to bricks-and-mortar.

Ocado Solutions, by comparison, had a stronger 2022. New deals signed with retailers in Poland and South Korea took its number of international partners to 12 and its long tail of promised international customer fulfilment centres began to come online.

After years of bearing the costs of international partnerships upfront with no revenues, Ocado chief executive Tim Steiner says 2023 will be the first year that Solutions makes a profit.

However, when asked about the shorter-term prospects of the joint venture, Steiner was less positive. He said he was “confident in the recovery of sales momentum and profitability of Ocado Retail in the mid-term”

In a high-inflation environment and with a more premium brand perception, what can Ocado do to stop the rot domestically?

Price wars

Tim Steiner

Tim Steiner is ‘confident in the recovery of sales momentum and profitability of Ocado Retail in the mid-term’

Despite its more affluent customer base, Ocado has not been immune from steep price rises.

Ocado’s average basket size last year fell 11.5% for Ocado, while the average basket value dropped 8.5%, despite a 13% increase in active consumers during the period.

While Steiner says Ocado is only seeing a 7.8% increase in price across its products, which he maintains is among “the lowest inflation in the industry”, it has still been forced to act to address price.

Ocado has unveiled its Price Promise, allowing customers to compare prices on their baskets like-for-like with Tesco on more than 10,000 products. The initiative follows the January rollout of its Everyday Savers line.

Steiner says matching prices against Tesco, rather than Aldi or Lidl, means Ocado can effectively have the best of both worlds while better reflecting its large assortment.

He explains: “Tesco is obviously the largest grocer in the UK and we think that’s where most of our customers are looking to understand [the best price]. We sell 50,000 products and the limited assortment discounters only sell a couple of thousand.

“If we’re matching against Tesco on 10,000 products, and Tesco are matching Aldi on a few hundred products that are relevant, then in effect you’re getting that thrown in as well”.

However, GlobalData analyst Joe Dawson questions how big an impact the move will have. He says in the cost-of-living crunch, customers have “come to see grocery delivery as a luxury, rather than a necessity”.

Ocado’s push also represents a much later move on price than rivals such as Tesco and Sainsbury’s, which both rolled out price investments of hundreds of millions at the mid-point of last year.

Missed the boat

Rampant inflation coincided last year with the first pandemic-restriction-free year since 2020. As Shore Capital analyst Clive Black points out, this had an impact on the online food market.

Ocado van outside warehouse

Tim Steiner says Ocado is ‘now taking market share from everyone’

He notes: “With consumer confidence remaining low and real living standards falling in the UK, the immediate outlook for the domestic online grocery market remains challenging, with participation falling from a pandemic peak of over 15% down to around 11%.”

Despite this, the latest Kantar grocery market share data for the four weeks to February 19 showed Ocado bucked that trend to capture share with sales surging 11.3%.

However, Ocado has been forced to pause the opening of new distribution centres in the South East and North West of England. Steiner says it has the capacity to deliver over 700,000 orders a week but is fulfilling just 400,000.

“We’re acquiring new customers all the time and we will grow into the capacity that we’ve built,” he insists. “If we were doing 500,000 or 600,000 orders it would be very profitable and that’s the challenge for Ocado to reach at the moment”.

As a result of much-publicised capacity issues during the pandemic, Ocado was never able to meet demand. Now, it has too much supply for dwindling demand, leaving many to wonder whether it has missed the boat.

Steiner does not think so. “During the pandemic, the market went from about 7% to more than 15% and it’s come back to 11%. The market has grown, we’ve grown, everybody has grown and we’re now taking market share from everyone.”

Despite his protestations, Ocado’s share price tumbled after its results were announced. There is also a question of money lingering between Ocado and its joint venture partner Marks & Spencer.

M&S had been due to pay Ocado the final £191m instalment of its deal in 2024. However, Steiner says the final figure is expected to be £70m less, while talks remain ongoing between the two businesses.

While further investment in price may be enough to keep existing customers happy and reverse shrinking basket sizes, the more existential question over the ecommerce bubble in the UK is a harder one to answer.

Steiner and all at Ocado will be counting down the days until Solutions can start shoring up the bottom line. Whether that will ever be enough to plug the holes domestically remains to be seen.