UK online retailer Ocado remains confident despite investor concerns about capacity, the spectre of competition from Waitrose and the cost of improving customer service.
Ocado’s shares dropped by nearly 12% today (19 September), even though it posted strong sales growth for its third quarter.
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Analysts said shareholders were unsettled by continuing problems with capacity at the firm’s Hatfield customer fulfilment centre, with Waitrose stepping up its own online operation within the M25 and an announcement that Ocado’s margins would be hit by investment in improving customer service.
A spokesperson said that improvements at Hatfield and an upcoming second customer fulfilment centre in Warwickshire will alleviate some of the pressure of capacity shortfall.
She added that Ocado’s customer service and freshness of its products will ensure its position in the online sphere.
“As ever with Ocado it’s all about service – 99% of our deliveries are on time or early – and our proposition of freshness is a key ingredient,” she said.
The spokesperson was sanguine about Waitrose’s investment in the online sector. “I don’t think Waitrose’s expansion within the M25 is a threat. There is a strong belief that there is room in the market to keep growing,” she insisted.
When asked about the fall in Ocado’s shares today, the spokesperson said she could not comment on the markets.
Ocado’s assessment of growth in the UK online grocery market is echoed by data from IGD, which currently values the sector at GBP4.8bn, or 3.2% of food sales. IGD expects the figure to double in the next five years, reaching GBP9.8bn in 2015.
However, analysts are withholding judgement on Ocado, despite the company’s confidence.
Justin Scarborough, a retail analyst for RBS, said: “Looking into 2012, if average orders build (4Q sales growth will be a very important number) as the management expects and if the investments at Hatfield enhance its operational metrics, then the shares could have a much better time than they have had since initial public offering. The issue today though is that there are a few too many ‘if’s’ to attract new investors.”
