Online grocery retailer Ocado has reported a 52% rise in revenue during the third quarter of the year, as the public made a dramatic shift to eCommerce during the COVID-19 enforced lockdown.
Retail revenue rose 52% to £587.3m in the third quarter (which ended on 30 August 2020). The group also said the customer reaction to the switch over to Marks & Spencer (M&S) from Waitrose products on 1 September has been positive.
The improved trading, and positive effect increased sales have on margins means Ocado expects full year cash profits (EBITDA) of ‘at least’ £40m. In the same time period last year, Ocado reported pre-tax losses of £214.5m.
The firm also experience a 27% rise in retail revenue growth, which demonstrating Ocado’s ability to meet unprecedented and sustained, demand for online grocery in the UK following the outbreak.
Ocado’s switch to M&S initially caused some issues for shoppers, as the retailer had to cancel some orders due to the high demand. The firm also temporarily halted deliveries to staff members to help clear an order backlog of customers.
Melanie Smith, Ocado Retail’s Chief Executive, said: “Our aim is to continue to set the bar as we begin again to welcome new customers who are seeing the benefits of online shopping in ever greater numbers and we remain focused and on track to increase capacity by 40% through to 2021.”
The shares rose 3.4% following the announcement.
Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown
The switch over to Marks & Spencer is doing Ocado’s retail business a lot of favours. The launch means Ocado customers are putting an extra five items in their virtual baskets on average, and the weighting of M&S goodies compared to Ocado is running ahead of predecessor Waitrose. One benefit for Ocado is that the increased trading means margins are looking brighter. That’s because as more orders rattle through its expensive robotic warehouses, its infrastructure enjoys leverage as each extra sale doesn’t cost a lot and can drop through to profit.
However, while an excellent start, this isn’t the main event at Ocado. Having sold half the retail business to its new retail partner, there’s only so much juice to be squeezed from this orange. This could bode well for Marks & Spencer, whose sales could do with a boost, and who staked a lot on this deal paying off. 98% of customers are already shopping at M&S though, so it will be interesting to see how many of these sales will have simply transferred from stores.
But the headline act for Ocado is still the Solutions business, news of which was noticeably absent from the trading statement. This is where the group charges retailers to use its coveted automation technology to help them increase their own online footprints. Brokering deals in this department is what should really move the dial. The pandemic has increased demand for online groceries, which could turn out to be a long-term tailwind. Sadly for now, it looks like we’re going to have to wait and see how things are looking in this department.