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Ocado profits fall but company insists growth is just beginning

Ocado said 2018 has been a transformative year for the eCommerce retailer and solutions provider as it reveals its full-year results, but CEO, Tim Steiner, insists the company’s growth is only just beginning.

The e-tailer was upbeat as it announced its results for the 52 weeks ending 2 December 2018, despite a widening of losses it put down to investment in its solutions business.

Ocado revealed an increase in revenues of 12.3% while losses widened from £9.8 million in 2017 to £44.9 million in 2018. Revenues from its retail business increased 12% to £1.48 billion, and its solutions business increased 15.8% to £123 million. While EBITDA from retail increased, the innovative solutions side of the business saw its EBITDA widen to £17.9 million.

“2018 has been a transformative year for Ocado – the result of many years of hard work. But the growth story is only just beginning,” Steiner told media on a call this morning, which included multiple “no comments” on the rumoured M&S deal and the hint of a new super-fast delivery solution to be launched later today.

Tech innovations and a new delivery proposition

During 2018, Ocado continued to innovate when it comes to technology, supported by the hiring of 300 programmers, increasing the technology headcount by 76% over the last three years, while the number of patent applications has increased from 73 to 395 over the same period covering 80 innovations in real-time control systems, robotics, machine learning and AI and routing systems. Robotic picking tests continue in the UK at its Andover site, while it plans to start using this in live production in the coming months.

Its new fulfilment centre in Erith now processes over 30,000 orders per week and in its first three weeks reached the same volume it took the company 32 weeks to achieve at Andover. Van drops per week hit 190 and the business is increasing this target to 200 per week this year.

Meanwhile, Ocado’s delivery punctuality stands at 94.9% (slightly down from 95% the previous year), and order accuracy remained stagnant at 98.8%. Ocado also recently launched paperless receipts saving 20 million sheets of paper.

Ocado said this morning it would be announcing a new super-fast delivery service called Ocado Zoom, which Steiner said was not in response to the threat of Amazon, but due to customer demand.

"Amazon haven’t made a big impact in the UK grocery space"Tim Steiner, CEO, Ocado

Regarding Amazon, Steiner said: “We’re always aware of them considering global scale, reach and size, but it’s not a big factor today in the UK grocery market – the competition market is really between ourselves and the big bricks and mortar retail operations. Amazon haven’t made a big impact in the UK grocery space.”

Retail partners and the M&S rumours

Over the last 12 months, the online retailer and technology provider has signed three new partnerships to develop its Ocado Smart Platform with Sobeys in Canada, ICA in Sweden and Kroger in the US. Meanwhile it said good progress had been made with existing partners including Bon Preu which launched its online offer in Catalonia and November and Groupe Casino continues building work at its first customer fulfilment centre (CFC) in Paris. Sobeys has already begun work on its CFC in Toronto, while ICA has identified a location in Stockholm and Kroger has committed its first three CFCs out of total of 20 over the next three years. Meanwhile, back in the UK, Morrisons customer orders are being fulfilled from a centre in Erith in South London named CFC4 – the location of the new CFC5 will be determined in the first half of this year – and Ocado continues to support the grocer’s aims of a store-based pick solution.

Ocado stated cash fees from its partners in 2018 hit £200.1 million, up from £146.1 million in 2017.

Catherine Shuttleworth, CEO and founder of Savvy, commented: “Sales growth from Ocado is positive news as more shoppers look for an online grocery solution supporting the ongoing shopper demand for convenience. Its route to profitable growth will be in markets outside of the UK and will be reliant upon selling the platform to more retailers with greater reach. The ongoing rumours about a deal of some kind with Marks & Spencer will no doubt heat up as the deadline on the Waitrose contract looms large at the end of March.”

In regards to those M&S rumours which have circled in recent weeks, Steiner was quick to insist the company does not deny or acknowledge who it is in discussions with: “We’re in the business of talking to retailers, constantly talking to different retailers all around the world and we won’t comment on who we are talking to and who we aren’t talking to.”

But Steiner did go on to reiterate that under the current contractual arrangements with Waitrose, Ocado is not allowed to sell any own-label products from another substantial UK retailer while selling Waitrose products – which accounts for 4,500 out of the total 50,000 lines Ocado sells today. Under the terms of the Waitrose contract this would eliminate M&S from the discussions until the deal expires in September 2020, but due to a clause in the contract it may emerge from next month that Waitrose and Ocado will part ways in Q3 of next year.  

Only last week, Essential Retail revealed that M&S poached a new head of online food from Tesco, and despite Steiner’s attempts to dampen the rumours, the industry will have to wait to see if any development with M&S emerges in the coming weeks.


Ocado fact: the grocer over indexes in organic food by 1000%


Brexit

After a grilling over the M&S rumours, Brexit was next on the agenda and Steiner, and like many other UK grocers he explained how the e-tailer cannot stockpile fresh food due to its short supply chains.

“We hope they don’t, but if any of the routes into Europe grind to a halt due to checking on the European side, it will have an impact on every UK retailer,” said Steiner. “We hold seven days of inventory, we don’t have space for six months, nor can you because fresh food needs to be turned immediately – it’s not possible in the food business.”

While the retailer can’t stockpile its inventory, it can increase the number of mechanical spare parts it has in its fulfilment centres to ensure the facilities continue running. “So if there are any delays, we wouldn’t be affected by mechanical upkeeping.”

Shuttleworth added: “The UK supply chain is very efficient, but the downside of that is any disruption will be felt quite quickly. Yes, UK supermarkets will be looking at alternative suppliers in the UK for fresh foods, but the reality of the situation is that in the UK we consume in a global market.

“We have a limited amount of supply here in the UK and unless we have a well-planned and orderly Brexit, we’re going to need to brace shoppers for disappointment with their food shopping and price hikes to eat what they want and when they want it.”