Ocado Retail: basket case makes investors warehouse wary

The days when Ocado was dismissed as “starts with zero, will end with zero” have gone. But the UK online groceries and systems group can still spring nasty surprises. The volatile shares fell 9 per cent — to half their level a year ago — after UK joint venture Ocado Retail put out a disappointing trading statement.

Ocado’s basket had overflowed during the pandemic. A near-doubling of the UK grocery tech supplier’s market value secured it a place on the FT’s list of the top 100 gainers of 2020.

In the fourth quarter of 2022, sales of Ocado Retail, jointly owned with Marks and Spencer, rose just 0.3 per cent. It increased prices 7.6 per cent, less than big supermarkets.

That reflected a battle to win and keep customers. The cost of living crisis has driven even affluent shoppers to switch to discounters or cut back. Ocado Retail customers have been buying a few less items every shop, dragging down the average basket value by 1.3 per cent to £117.

Ocado Retail needs to sell more because its newly-opened warehouses have created overcapacity. Extra costs also include pricier energy, dry ice and marketing. These are squeezing margins.

Comparisons with last year’s numbers should become more flattering during this year, although ebitda will only be “marginally positive” in 2023. Ocado Retail says ebitda margins could touch 7 per cent in the mid term. That is optimistic, given fierce competition in UK grocery retailing.

Ocado’s share price drop is odd given that Marks and Spencer’s stock hardly wavered. Analysts ascribe a small proportion — perhaps as low as a tenth — of Ocado’s market value to the JV. One theory is that its bad news is a poor advertisement for Ocado’s broader business model.

Lockdowns have nearly doubled online groceries to 11 per cent of the total. But warehouses are proving less flexible than supermarkets for order picking. Ocado would not be the only pandemic darling to retain fewer gains than investors had hoped.

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