Ocado reviews UK expansion as shoppers cut back

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Ocado has said it may reconsider its timetable for expanding capacity in the UK as customers cut back on their online grocery shopping.

Tim Steiner, chief executive, said the group had already built new facilities to fill customer orders and that technological advances meant these sites could deliver more volume than initially planned.

“There will be two new [customer fulfilment centres] this year, at Bicester and Luton. We are looking beyond that to see if the current contraction merits any acceleration. We have got a lot of capacity to grow into,” he said.

However, he stressed that though the company might not now accelerate its timetable for expansion, it remained committed to existing plans for new fulfilment centres.

Since the peaks during pandemic, when Ocado was held back by its inability to quickly increase delivery capacity at its warehouses, the online grocery market in the UK has contracted by around a fifth as shoppers have returned to stores.

Sales at Ocado Retail, the group’s UK ecommerce joint venture with Marks and Spencer, fell 8 per cent in the first half.

“We are clawing back market share,” Steiner said. But he warned that lower average basket sizes — down 13 per cent to around £120 during the first half — meant Ocado Retail had to keep winning new customers to keep revenue growing. The venture expects to have close to a million customers by the end of the year, from 867,000 at present.

At the same time, profit margins are being squeezed by steep increases in labour, energy and product costs, with electricity prices alone rising 300 per cent on a year ago.

Ocado Retail’s earnings before interest, tax, depreciation and amortisation fell to £31mn in the first half, from £104mn last year.

The venture’s chief executive, Melanie Smith, will leave at the end of August but Steiner reiterated that this had been under discussion for some time and was “not at all” related to current trading.

Ocado’s “solutions” business in the UK, which provides technology and services to Ocado Retail and Morrisons, was also affected by the slowing market and cost pressure; earnings there were a third less than William Woods, analyst at Bernstein, had been expecting.

In the international solutions business Ocado said six customer fulfilment centres constructed in the US for Kroger — its most important single client — were increasing capacity as planned and revenue more than doubled to £59mn.

Although Ocado has not signed up a major new client for its technology since Japan’s Aeon in December 2019, Steiner said the company had “never been busier” in terms of negotiations with potential corporate customers and that its new technology, which reduces the upfront cost and increases the efficiency of fulfilment centres, had generated widespread interest.

But he declined to give any timeframe for new contract wins.

Full-year guidance was not altered from the company’s last update in May. Steiner reiterated that a £575mn equity issue and new bank facilities meant Ocado had sufficient funding to see it through to positive cash flow despite heavy investment in fitting out fulfilment centres. Capital spending this year is expected to total £800mn.

Ocado shares were down 2.5 per cent in midday trade but analysts were broadly relieved that there had been no further deterioration in the UK and no hitches in the rollout of customer fulfilment centres overseas.



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