Ocado provided a festive trading update for their retail division on Tuesday in which the online food retailer announced a higher number of weekly orders, but at a lower average basket value.
The online delivery service is partnered with Marks & Spencer and the premium food delivery service was evidently hit by shoppers tightening their belts and purchasing 8.3% less items per shop. Price inflation of 7.6% meant Ocado’s average basket value slipped 1.3%, compared to the same period last year.
Ocado noted 7.6% price inflation was the lowest of all major UK supermarkets for the period.
“While Ocado is winning new customers, people are buying less. This has an outsized impact on online deliveries which cost roughly the same to make whether the order is two potatoes and a block of cheese or a full weekly shop,” said AJ Bell investment director Russ Mould.
“Even with tiered charging based on how much you order, shrinking basket sizes are still likely to have a material impact on margins. Ocado is also at a premium price point which isn’t exactly aligned to the pressures on household budgets in the UK.”
Ocado shares were down 5.5% at 763p at the time of writing.
Ocado Technology
As we discussed last year, Ocado has a split personality to the extent they provide retail services to UK consumers, but at the same time operate a technology business establishing Customer Fulfilment Centres (CFCs) utilising the Ocado Smart Platform.
This side of the business has earned Ocado the title of being one of few FTSE 100 tech stocks, and has previously been priced as one.
“Ocado shares were the biggest faller in the FTSE 100 last year, with its share-price down 62%. The company’s management have been arguing for years that the company should be priced as a technology stock – and last year the market did exactly that – rerating its shares in line with other growth shares,” said Garry White Chief Investment Commentator at Charles Stanley.
“There has been a lack of clarity for investors on what the company is. Is it essentially a barely profitable supermarket – or is it a barely profitable high-tech cutting-edge group?”
Ocado’s retail margins are ultra thin and investors will watch closely for revenue growth in the technology solutions business following the rollout of additional centres to companies including Kroger in the US.