Ocado share price back on the rise as sales benefit from lockdown 2

by Jonathan Adams
economic order

Ocado share price back on the rise as sales benefit from lockdown 2

The Ocado share price was up almost 2% in early trading this morning after the online groceries delivery and warehouse automation tech company reported a 34.9% rise in sales over the 13 weeks to November 29. The FTSE 100 company told investors that an increase in midweek groceries shops using its service has made a difference to overall revenues, prompting it to raise its guidance for the third time this year.

Ocado’s UK-based retail-facing business is a joint venture with supermarket Marks & Spencer, with Ocado processing orders and fulfilling deliveries of M&S stock. Chief executive Tim Steiner yesterday detailed how online groceries patterns have shifted this year.

The company used to experience a peak in orders for delivery on Friday afternoon and Saturday morning. However, weekday slots are now just as busy. Mr Steiner puts this down to a combination of generally higher demand as more shoppers avoid supermarkets during the pandemic, and the practicality that delivery slots for peak times are limited. If customers want their groceries delivered, they have to be prepared for them to arrive when a slot is available.

Mr Steiner is also convinced that work-from-home practises established during the pandemic this year will continue to a significant extent once the virus is no longer an issue. He believes that employees, and companies, that have found they can work efficiently from home will continue to do so, at least to some extent.

At the beginning of 2020, market research data from retail sector specialist Kantar showed around 7% of the total groceries market was accounted for by online sales. That’s almost doubled to 13.7% over the course of 2020.

Ocado’s average basket is currently worth £133, which is also up on pre-pandemic levels. The company now expects earnings before interest, tax, amortisation and depreciation to come in at over £70 million. That’s a significant upwards revision from the forward guidance for £60 million, issued only last month.

However, despite the upwards revision of guidance for annual revenues, Ocado’s share price fell to a 7.2% loss yesterday, before this morning’s near 2% recovery. The company is currently valued at around £16.5 billion.

Ocado currently fulfils around 360,000 orders a week, but while the average basket is larger, the number of deliveries being made is up only 3% on last year’s average of 350,000 order a week. The company has struggled badly to ramp up capacity after it lost a major Andover warehouse to fire last year and the fact that its robotics-automated warehouse technology is harder to scale up.

Most traditional supermarkets have managed to double their online orders capacity, when click-and-collect services are factored in. They have largely done so by hiring thousands of more staff. Explaining why the same option was not available to Ocado, Mr Steiner said that it increasing capacity was not as simple as “sticking a load more robots on the grid or hiring more drivers: it requires many changes to algorithms”.

Three new regional warehouses being brought online next year, including the rebuild Andover property, will see Ocado increase its capacity by 40% within about 2 years. It takes the company time to ramp up capacity in new logistics centres. Its Erith site in southeast London still only operates at two thirds capacity, having been opened in 2018.

Brexit may prove another tricky obstacle for Ocado to overcome. The company’s drop in share price yesterday can be attributed to investor worries over the potential impact of a no-deal Brexit.

The company says its warehouses are already at the capacity of what they can stockpile in terms of EU imports. Ocado said yesterday that stockpiling just a month’s worth of non-chilled products would need as much as four times more warehouse space than it has. Mr Steiner warned:

“The bulk of what we sell is fresh food and you can’t store fresh food. We need free-flowing ports to bring product from the country of origin into the UK.”


This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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