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Ocado Retail predicts small fall in full-year sales and break-even profits as it wins new customers at a record rate – but shoppers trade down to manage food price inflation

Image courtesy of Ocado Retail/M&S

Ocado Retail says it is winning customers at record rates – but that shoppers are buying less and trading down as they adapt to the effects of double-digit food inflation. The online grocer has started to see that behaviour accelerate in recent weeks, and now expects to see a small fall in full-year sales, while earnings will be close to break-even. 

Ocado Retail – a joint venture between  Ocado Group and Marks & Spencer – today reports third-quarter sales of £532m in the 13 weeks to August 28. That’s 2.7% ahead of the same time last year. Revenues were also 42% ahead the same period in pre-pandemic 2019, excluding its Fetch pet supplies business. But while Ocado predicts that sales will grow by mid-single digits in the fourth quarter, that will not be enough to stave off a small full-year sales decline. 

Changing shopper behaviour

Ocado says the size of its active customer base has grown by 23% to 946k over the last 12 months – and that it is continuing to gain customers at record rates. In the latest quarter, the 13 weeks to August 28, However, for the moment those shoppers are trading down and buying fewer items in order to spend less – at the same time as food prices are growing by double digits. On average, customer baskets featured 45 different products during the latest quarter, 10% down on the same time last year, and now the same as pre-pandemic shopping patterns. At the same time, average basket values fell by 6% in the period, to £116. Ocado says it is helping its customers keep their food bills low, by investing in price and expanding its value-driven own label range. Its average selling price has risen by 5%, year-on-year – as customers offset a 7% rise in the cost of food it sells by trading down to lower priced alternatives. M&S own-label food continues to account for about 30% of baskets. 

Rising costs

The customer trend towards trading down and buying less has accelerated in recent weeks, says Ocado, and it now expects to see a small full-year sales decline, while earnings before interest, tax and asset write downs (EBITDA) are expected to be around break-even as costs, especially of energy and dry ice, hit profitability. Its electricity costs are now about three times higher than last year, and fuel is expected to be 15% higher. A sharp increase in the price of dry ice is expected to add between £15m and £20m a year to costs, and Ocado is now looking for alternatives. 

Ocado also has extra costs as it operates extra warehouse capacity – built out to address demand for online groceries during the pandemic – that is not yet full. The retailer has now opened its Bicester warehouse, adding an extra 30,000 orders a week and taking Ocado Retail capacity to about 600,000 orders a week – including headroom of more than 200,000 orders a week for future expansion. It has also added Zoom one-hour delivery sites in Canning Town and Leyton this year and plans two more in the next six months.

It now plans to continue adding customers to fill that capacity while addressing costs. 

Tim Steiner, chairman of Ocado Retail, says: “We remain focussed on providing Ocado Retail customers with the best possible value to help them navigate the cost of living crisis, and are encouraged by the positive underlying trends in the business which underline the value of Ocado’s differentiated proposition to customers. 

“Our online grocery model, which creates efficiency through advanced technology, offers customers a combination of competitive prices, the widest ranges, and industry-leading service. As we have seen in Q3, customer numbers are sharply up as consumers either switch from other providers or try online grocery for the first time; underlying productivity in fulfilment and the last mile continues to improve; and the new CEO of Ocado Retail, Hannah Gibson, brings fresh vision and energy to the business. As consumer spending stabilises, we expect Ocado Retail will again deliver attractive and accelerating growth in sales and a strong recovery in profitability.

“For all these reasons, we are optimistic for the future even while recognising the challenges that higher energy bills and other inflationary pressures are creating for our customers today.”

Ocado Retail’s incoming chief executive Hannah Gibson – promoted from within – takes over on September 20. Ocado is ranked Top500 in RXUK Top500 research

Food inflation

Today’s update comes as the latest Kantar figures show grocery price inflation rising by a record 12.4% over the last month – with “no end in sight”. “Now standing at 12.4% for August, the latest figure means that the average annual grocery bill will go from £4,610 to £5,181 if consumers don’t make changes to what they buy and how they shop to cut costs,” says Fraser McKevitt, head of retail and consumer insight, Worldpanel Division, UK, in today’s statement. “That’s an extra £572 a year.”

Kantar says supermarkets are responding by expanding their own label ranges – and sales of the cheapest own-value ranges have risen by 33% this year, on last year. Nearly one in four baskets contains one product from these ranges. Spending on all retailer own-label lines was £393m higher in the last four weeks, taking own label’s market share to 51.1%. 

Shoppers bought 3.8% more groceries in the 12 weeks to September 4. Over the same period, Ocado had a 1.7% share of a market that is led by Tesco (26.9%), Sainsbury’s (14.6%), Asda (14.1%), Aldi (9.3%) and Morrisons (9.1%). Lidl was the fastest growing grocer, with a market share of 7.1% following a sales increase of 20.9%. The Co-op, which has adopted ecommerce through a headless commerce strategy of working with a range of delivery partners, has seen its sales grow by 2.7% over the period, and has a market share of 6.5%. 

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