Online grocery retailer Ocado has announced that it is pausing the rollout of new distribution centres in the UK. This comes as the company made a record annual loss of more than £500m, largely attributed to the “challenging market” affecting sales and profits. Ocado’s UK joint venture partner, Marks & Spencer, was due to pay Ocado £191m in 2024, the final installment of a £750m joint venture deal agreed in 2019. However, this payment is expected to be approximately £70m less, although discussions with M&S are ongoing. Furthermore, new distribution centers in the north-west and south-east of England have been put on hold as Ocado reports that it had built capacity to process 700,000 orders a week in the UK but was delivering less than 400,000, and therefore expects to take several years to reach capacity.
The decline in revenues at Ocado Retail, its joint venture with M&S, was partly due to the fact that customers ordered fewer items per shop, with the average basket size falling to 46 items in 2022 from 52 in 2021. Furthermore, the company’s Chief Executive, Tim Steiner, said that Ocado experienced a “challenging year” in 2022, as customers put fewer items in their baskets and used more discount vouchers. As fuel and food prices have increased worldwide, Ocado has been grappling with higher cost inflation from food suppliers, and raised its average prices by 4.5% last year, to £2.55 an item from £2.44.
Despite the challenges, Steiner said that Ocado had given a “strong performance in a very bad year” and claimed that its customers were experiencing less inflation than in the wider market, at just under 9% for each item. He suggested that the business could benefit from families switching from dining out to eating at home, as inflation rates were higher in restaurants. Steiner also expects that the online grocery retail market will return to growth as Covid-19 restrictions are lifted, stating that Ocado expects to take customers from rivals, as its service is better.
Shares in Ocado fell 10% on Tuesday, making it the biggest faller on the FTSE 100. Nonetheless, the company’s active customer numbers increased by 13% to 940,000 in 2022 and its share of the online grocery market grew to 12.3% from 11.7% in 2021, according to Nielsen figures. Orders each week averaged 377,000, compared with 357,000 in 2021.
Ocado has developed automated warehouses where robots move around grids picking and packing groceries, and sells its warehouse technology around the world. The company opened 12 sites for its partners, including Kroger in the US: nine full-size automated warehouses and three smaller Zoom sites for its rapid delivery service. Additionally, on Tuesday, Ocado said it was speaking to potential partners about using its technology to pick and pack non-grocery items.
In conclusion, Ocado is facing many challenges in the online grocery retail market, including declining sales, and is therefore pausing the rollout of new distribution centers in the UK. However, the company’s CEO remains optimistic about its prospects and believes that Ocado will remain competitive due to its superior service.