Find out what the analysts make of Ocado’s move into the black by generating £7.5m pre-tax profit before exceptionals in its first half.
From a strategic perspective Ocado has announced that it is planning for a third customer fulfilment centre for the group’s sole use. No doubt this development will eat into the cash pile, depress operating metrics and extend the period of poor profit delivery from the group, albeit should be lower cost development – we wonder if Ocado is hoping for another Morrisons to come along and buy the asset from them, so becoming a property developer in addition to a glorified management consultant.
Converging to the online industry norm for such an immature player is surprising. Ocado speaks of an 80% increase in EBITDA year on year, which is code for just how low profitability has been for so many years, remember this group has been going for thirteen years. Management also makes mention of increased price competition and sets out an expectation for its own retail business to grow ‘broadly in line with, or slightly ahead of, the online grocery market’
For a small group with a skill set that is supposed to be industry leading, why is Ocado not expecting to shoot the industry lights out? Surely, Ocado should be materially beating incumbent storebased operators; if not this undermines a claim for a premium rating, noting as we do that 15.6% gross retail sales was a little underwhelming to us in H1 – Mike Stewart, Shore Capital
Customer-facing operating metrics improved further (on time 95.7% from 94.4%, accuracy 99.2% from 98.9%), range continued to build (35k SKUs from 31k), specialist [pet] site Fetch.co.uk has been launched to all customers and is growing strongly, and own-brand sales were up over 50%. We believe this progress, alongside ongoing pricing initiatives such as Low Price Promise, is enabling Ocado to continue to grow marginally more quickly than the online grocery market – Andrew Wade and Matthew Taylor, Numis
The interims today show the expected move into profit on the back of the revenue from Morrisons, notwithstanding some complicated accounting, but the big focus recently has been on whether Ocado would announce the location of their next distribution warehouse and there is not much about that, although it is to be in Andover (not far from Waitrose’s HQ in Bracknell) – Nick Bubb, retailing analyst and consultant
As the Big Four are undergoing an intense price war to counteract the momentum of Aldi and Lidl, Ocado has taken steps to ensure it is not exposed. A convincing own-label has improved its accessibility, with sales up 50% over the period, and its Low Price Promise – while dragging sales growth – keeps its offer competitive with Tesco.
Ocado ultimately faces a race against time; looking to capture sufficient revenue levels that absorb its cost base at a profitable rate, as the likes of Tesco, Asda, Sainsbury’s and Morrison attempt to win back market share. Furthermore the expanded presence of the discounters, as well as the digital progress of Ocado’s online partner Waitrose, will provide an additional hurdle to penetration gains. In this respect, as we have previously highlighted, Ocado may still yet have to accept that licensing its fulfilment assets is a primary profit stream, rather than just a subsidiary business – George Scott, Conlumino