Ocado’s Christmas sales rise has brought some cheer to investors, but analysts say the retailer’s path to sustainable profit remains riddled with risks.
Ocado’s share price rose by 4% in London this morning (15 January), after the online grocery retailer reported gross sales up 14% in the six weeks to 6 January versus the same period of the previous year.
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Its figures show that momentum continued from the previous fiscal year, with today’s release also reporting that gross sales for the 52 weeks to 25 November increased by 11%, to GBP716.2m (US$1.15bn).
“This is a pleasing set of numbers from Ocado, especially given the intense competition in the grocery sector over the festive period,” said Columino analysts.
They highlighted several reasons why Ocado’s numbers show it is going in the right direction. These include higher order numbers and basket spend, and strong growth for own-label and non-food items.
Such trends, if they continue, should help to improve profitability and also reduce Ocado’s reliance on ex-partner Waitrose for food supply.
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That, however, is where the festive cheer ends and the brooding skies of January take over. In other words, Ocado still has a big challenge to corner enough profits to remain viable in an increasingly fraught grocery sector.
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By GlobalData“At present, we see satisfactory but not especially dramatic or noteworthy sales growth from Ocado,” said Shore Capital’s Clive Black and Darren Shirley. “And so the business does not have sufficiently strong revenue expansion to make it suitably profitable to deliver returns that stand out from a positive perspective.”
They pointed out the strong performance of peers, many of which are building stronger scale than Ocado. Waitrose’s position as both a competitor and a supplier to Ocado in London looks more and more uncomfortable, following Waitrose’s declaration of 37% online sales growth between 4 November and 24 December.
The analysts also highlighted online sales growth of 18% at Tesco in the six weeks to 5 January and a third-quarter online sales rise of 15% at Sainsbury’s.
On this basis, Ocado’s problem is simple: it needs more customers. To that end, the firm’s CEO, Tim Steiner, said today the firm will “substantially increase our capacity” in 2013 via a second ‘customer fulfilment centre’ in Warwickshire, in England’s West Midlands.
Will it be enough? Columino analysts see stronger economies of scale improving profits, but, in the near-term at least, Shore Capital worries about teething problems in transferring supply.
Then, lingering beneath a discussion on Ocado is always the brutal question of whether or not the retailer’s business model is effectively doomed, given its lack of independent food supply and relative lack of firepower to prevent larger grocers muscling in on its space.
Shore Capital analysts highlight the looming spectre of ‘Click & Collect’, a format lauded last year by Sainsbury’s CEO Justin King and which wipes delivery costs for retailers while potentially offering more flexibility to shoppers.
“2013 is expected to see a step change in stores gaining this capability,” say Black and Shirley. “However, with no store based assets, Ocado is to our minds disadvantaged by C&C.”
Ocado’s Christmas and full-year sales figures show promise, but the retailer needs to show more than that in the year ahead.
