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Ocado shares fall on reports of squeezed profit margins Ocado shares fall on reports of squeezed profit margins
(about 4 hours later)
Shares in Ocado have plunged after the online grocer reported that profit margins were under sustained pressure amid fierce competition between food retailers. Shares in Ocado have plunged after the online grocer reported that profit margins were under pressure amid fierce competition between food retailers.
Sales – excluding its partnership with supermarket chain Morrisons – rose 13.6% to £314m in the 12 weeks to 7 August, Ocado said in a trading statement. Average weekly orders rose 18.9% to 226,000 but the average order size dropped 3.4% to £107.94. Sales – excluding its partnership with supermarket chain Morrisons – rose 13.6% to £314m in the 12 weeks to 7 August, Ocado said in a trading statement. Average weekly orders rose 18.9% to 226,000 but the average order size dropped 3.4% to £107.94, largely because of price cuts implemented to keep pace with the supermarket price war.
Tim Steiner, Ocado’s chief executive, said: “As the market remains very competitive, we are seeing sustained and continuing margin pressure and there is nothing to suggest that this will change in the short term.” Shares in the group sank nearly 15% to 275p in morning trading as Tim Steiner, Ocado’s chief executive, said: “As the market remains very competitive, we are seeing sustained and continuing margin pressure and there is nothing to suggest that this will change in the short term.”
Steiner said the increase in orders was Ocado’s best volume increase in more than five years. But shares fell more than 12% in early Tuesday trading due to concern about pressure on margins and the consequences for profits. Duncan Tatton-Brown, Ocado’s finance director, said it would not be a surprise if analysts cut their annual profit forecasts. Analysts said they expected to cut their annual profit forecasts by between 1% and nearly 3% in the light of ongoing price-cutting in the grocery market as the major supermarkets try to take on the fast-growing discounters Aldi and Lidl.
Food retailers are locked in a price war fuelled by the success of the German discounters Aldi and Lidl as consumers look to get more value from their squeezed incomes. Duncan Tatton-Brown, Ocado’s finance director, added that a squeeze on profits from rising costs, on top of price cuts, would come through in the next few months as food retailers begin to import more food when UK harvests subside later this month. The price of buying food in Europe has risen significantly as the value of sterling against the euro has fallen by about 10% since the Brexit vote.
Ocado did not give an update on its long-running attempt to sign up an overseas retailer to use its delivery systems. It had expected to announce a deal by the end of last year but Steiner said negotiations had been more difficult than he expected. Tatton-Brown said it wasn’t clear whether the major grocers would put prices up to offset rising costs. “We’ve decided to follow the market leader on price and if the market is willing to let the price of goods grow then our prices will rise as well. At the moment that is not happening, the reverse is happening.”
Steiner said the increase in orders was Ocado’s best volume increase in more than five years. The falling size of individual orders has been offset by a rising number of customers who are ordering more frequently.
Ocado’s share price has been volatile since the company floated in 2010. After dropping below the 180p offer price for almost two years, they revived after a deal was signed to distribute Morrisons’ online orders.Ocado’s share price has been volatile since the company floated in 2010. After dropping below the 180p offer price for almost two years, they revived after a deal was signed to distribute Morrisons’ online orders.
The agreement appeared to offer the prospect of further deals with overseas retailers without the technology for large-scale online orders but no such contract has materialised. The agreement appeared to offer the prospect of further deals with overseas retailers without the technology for large-scale online orders but no such contract has materialised as yet.
Ocado shares fell as much as 12.8% to 281p on Tuesday morning and were the biggest losers in the FTSE 350 index of large and mid-sized companies. Continued disappointment that Ocado is yet to sign up a long-awaited international partner to use its technology is also putting downward pressure on the group’s share price.
“The extended wait for details of a first international agreement does not inspire much confidence,” said James Grzinic, an analyst at Jefferies, in a note. He said the failure to sign a deal suggested Ocado’s technology offer was “not quite the finished article for its potential client base”.
Fears that finding a good deal will be elusive have risen since Morrisons signed a wholesale partnership with online specialist Amazon, which has launched its own grocery delivery service in London, Ocado’s heartland.
Tatton-Brown said Ocado was “not concerned” about the launch of Amazon’s Fresh service, which analysts said had not appeared to affect Ocado’s sales performance so far. “We think Amazon will add to channel shift that is already happening. The more people in the market helping customers to shop for groceries online the more people will do that. It will put pressures on other channels, more than online,” he said.