Tim Steiner, chief executive and co-founder of Ocado, has learned over 20 mostly loss-making years how to put a positive spin on the numbers, but he has excelled himself. As the group reported a thumping full-year loss of £501m, caused in large part by a huge earnings reversal in its UK joint venture with Marks & Spencer, Steiner claimed the same operation had “shown its resilience”.
Really? OK, the UK business added customers and online market share, but they were about the only metrics going in the desired direction. Turnover fell 3.8% as customers trimmed the size of their online baskets and top-line earnings from the joint venture collapsed from £150m to minus £4m. Rather than a show of resilience, this looked more like a demonstration of how the online grocery model can be horribly inflexible from the point of view of the operator.
During the pandemic lockdown period, Ocado’s problem was that it didn’t have enough capacity to meet the sudden boom in demand. Now, after expanding rapidly to capitalise on what Steiner claimed in 2021 would be “a dramatic and permanent shift towards online grocery shopping”, it faces the opposite challenge: too many warehouses and robots.
The gap between capacity and the actual level of sales at Ocado is enormous. A new distribution warehouse opened in Bicester this year and another is coming soon in Luton. At that point, the company says it could make 700,000 deliveries a week, equating to annual revenue of about £3.9bn. Actual orders last year were more like 400,000 a week and turnover was £2.2bn.
Demand will catch up eventually because nobody doubts the quality of Ocado’s customer offer and service. But, as the company concedes, the process could take years. In an attempt to stimulate demand and recover fixed costs, Ocado is now reinstating a limited price-match pledge with Tesco that it dropped a couple of years ago. The script wasn’t meant to be so complicated.
Still, optimistic shareholders might reflect, doesn’t the excitement lie in the deals and partnerships with 10 overseas food retailers to supply robots, warehouses and online expertise? Isn’t the real prize the annuity-like streams of income that will eventually flow from revenue-based contracts?
Well, yes and no. In the very long term, the international adventures – from France to the US to Korea – will indeed be the crucial contributor if Ocado’s share price of 549p is ever to get close again to the frothy £28 seen during Covid. But the UK operation is not irrelevant to the wider story.
It is, after all, “the shop window” for Ocado kit. Overseas partners may gasp admiringly at the wondrous net promoter scores achieved in the UK, but they may also want to be sure not to fall into the same trap of adding too much capacity too soon. M&S may now pay £70m less than the maximum under the terms of the 2019 joint venture deal, which is not a great advertisement.
Then there is the fact the UK business is also meant to contribute to Ocado’s big and shiny overall group target of £750m of Ebitda (earnings before interest, tax, depreciation and amortisation) in 2027. The date is so far in the future that the current UK capacity mismatch should be resolved well before then. But annual performances along the way also matter because the hot debate in the City is whether the group will need to raise fresh capital (again) to fund its overseas expansion before the projected “inflexion point” of positive cashflow arrives 2027.
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Ocado is sticking to all its mid-term targets, it should be said. There was no hint of backtracking. But one can also understand why the shares fell 12%. There were no positive surprises within these full-year numbers, just a reminder of how many plates Ocado has to keep spinning at home and abroad. As things stood in 2022, this was a “growth” business reporting an advance in group-wide revenues of a negligible 0.6% and reporting a pre-tax loss of half a billion quid. A triumph in 2027 feels a very long way off.
