Can online favourite Ocado make a comeback, or will its share price sink lower?
Ocado’s share price fell nearly six per cent in afternoon trade as the “magic” of the online retailer’s venture with Marks and Spencer did little to buoy the confidence of investors
In its start of year trading update Ocado revealed that retail revenue grew slightly by 3.4 per cent, although a 7.5 per cent decrease in basket size f living crisis has sent shoppers on the hunt for cheaper options.
On face value Ocado’s results compared favourably with last year’s pre-tax loss of £501m.
But Ocado appears to be another retailer for whom life is returning to normal with the cost of living crisis meaning customers were not able to splash out on the number of organic foods the grocer had been hoping for.
Julie Palmer, partner at Begbies Traynor, said: “The pandemic turbo-charged Ocado, pumping up hopes the upmarket online retailer was at last living up to its potential and finally on course to start delivering regular profits, only for these dreams to be dashed as the coronavirus eased,”
Traynor said that a “combination” of consumer shopping habits normalising with the return to the office, the cost-of-living crisis and soaring inflation led Ocado to a loss at that time.
Despite this Ocado said today that the number of active customers reached 951,000 at the end of Q1, up 13.8 per cent year-on-year.
“We continue to attract more and more customers to Ocado, by investing in great value for customers including our new Ocado price promise and providing unbeatable choice and service,” Hannah Gibson, Ocado retail’s chief executive officer, said.
In a bid to compete with the nation’s biggest supermarkets, Ocado launched a Tesco price match on over 10,000 products. “We can give our consumers confidence that we’re offering them great value,” Gibson said in a media call this morning.
It comes as Kantar published its supermarket inflation data which revealed that Tesco had the leading market share with 27.4 per cent and Ocado just 1.8 per cent.
Ocado does not immediately register as a discount name and, in the current environment where a cost of living crisis is seeing many search solely for value, there has been an impact,” Richard Hunter, head of markets at interactive investor, said.
He continued: “In addition, food inflation is currently running at around 18 per cent, while energy costs and labour shortages remain something of a drag on the sector. While it is evident that customers are still coming to Ocado, It tends to be more selective.”
Ocado does not immediately register as a discount name
Richard Hunter, head of markets at interactive investor
Chris Beauchamp, chief market analyst at IG Group said that for a company at the sharp end of the cost of living crisis, Ocado numbers were “the first real ray of light for a while”.
“Customer numbers are up, and even the average basket value is holding steady. These are the kind of numbers on which a recovery can begin, and if inflation comes down in the year ahead perhaps Ocado’s share price can recover too, reversing the dismal underperformance against the FTSE 100 so far this year.
Michael Hewson, chief market analyst at CMC Markets, was less positive. He said since it posted its full year numbers at the end of February the Ocado share price had come under further pressure over concerns about its ability to grow its revenues, sliding to five-month lows earlier this month.
“Today’s numbers for its retail business are encouraging and have come in at £584m, a rise of 3.4 per cent on last year, while average orders per week have risen 3.6 per cent to 381k.
Average basket value remained flat, despite a fall in basket size and a rise in active customers to 951k, a rise of 13.8 per cent year on year. This trend continues to show that with ever rising prices Ocado customers, like a lot of other retailers, are spending more money and getting less. Ocado kept its full year guidance unchanged.
The winners in the supermarket sales stakes, according to Kantar have once again been Aldi and Lidl who both saw 12-week sales rise by over 25 per cent, while both Sainsbury and Tesco posted gains of 6.9 per cent. Asda saw sales growth of 7.3 per cent, while Morrisons was the big loser with a gain of 0.1 per cent. Iceland and Waitrose saw a 9.6 per cent and 2.1 per cent spend gain year on year.
“With food price inflation now at a new record high of 17.5 per cent, its quite clear that UK shoppers are spending a lot more money for the same products, while the footfall increase at the main grocers suggests that people are shopping around a lot more in order to secure the lowest price.
Chris Beckett, head of equity research at Quilter Cheviot said: “Ocado retail delivered slightly weaker than expected sales in Q1 as renewed customer growth was offset by customers buying fewer items. In fact, average order value was flat and given how high food inflation has been, it is surprising to see it struggle to boost revenue in a time of elevated prices.
“Management believe sales growth should improve as we go through the year. It is hoping that as inflation is expected to fall sharply, consumer confidence will return as cost of living struggles potentially fade and should therefore see improved sales. It will also have easier comparatives following a weak end of 2022 and beginning of this year.
“Ultimately, the joint venture with M&S is only about 10 per cent of the overall group’s valuation. What is seen as more important is the success of the international technology business. Indeed, you just have to look at the partnership with Kroger in the USA and the fact it is pausing new customer fulfilment centres while they refine the operating model. This is far more important to the long term valuation of Ocado and the present valuation of the group is discounting little immediate success.”