Ocado shares fell by more than 13% after the trading update was announced as investors became nervous about the strength of the business. In the 12 weeks to August 7, sales growth was 16.9%. Not bad as a stand alone figure, but compared to sales growth of 20.8% in the previous six months and growth of 19.5% this year so far, that’s a significant dip. Shares were around 115p in early trading on Monday, a significant fall from its flotation price of 180p.
Ocado said the main reason behind the sales slowdown was capacity constraints at its distribution centre in Hatfield. But the online grocer still hopes to achieve higher growth for the rest of its financial year as it focuses on increasing capacity. The group is investing £80m on improving its Hatfield distribution centre, and hopes to be able to cope with 140,000 orders a week in the next couple of months – an increase of 29,000 from the third quarter. Plans are also under way for a new distribution centre in Warwickshire, although the earliest it’ll be up and running is late 2012.
Nonetheless, the capacity squeeze has affected delivery times and order accuracy, and Ocado said the cost of trying to improve these issues means it’s likely to miss analysts’ full-year earnings estimates by about 5-10%.
The online grocer is also facing challenges from the squeeze on consumer spending, which has seen the average order slip from £113.59 to £111.08 year-on-year as customers cut back to cope with rising food prices. It’s also facing competition from supermarkets looking to provide a similar service for a lower price - including Waitrose. Ocado started out as Waitrose’s delivery arm, but is now in fierce competition after the supermarket started delivering to homes within the M25 – Ocado’s stronghold.
The firm has generated a good deal of loyalty – its customers verging sometimes on the evangelical – which should stand it in good stead. But if things continue like this, it might be a while before Ocado’s business model bears fruit again.