Ocado profits flat as tech investment hits home

Ocado has posted flat group profits, as investment in its solutions business has impacted its full-year financial results. 

Revenue from retail sales increased 12.4% to £1.3 billion, while solutions revenue increased 16.2% to £115.5 million.

Meanwhile, Ocado’s solutions business – which has resulted in international partnerships to provide online grocery solutions in the past year – recorded a fall in EBITDA to 50.9% to £2.7 million. 

This fall, combined with a 4.5% increase in retail EBITDA, resulted in group profits overall remaining flat at £84.3 million.

Ocado CEO, Tim Steiner said the last year had been “transformational” for the grocery e-tailer. 

“We have primed our Ocado Solutions business for growth and received an important validation of the business model through our latest partnerships with Groupe Casino and Sobeys. Looking ahead, we are confident that we will be able to do further deals with the momentum of new signings building over time,” he said.

“At the same time, our unrelenting focus on our customers in the UK has delivered 12.4% growth in retail revenue and further significant market share gains as well as a 4.5% increase in Retail EBITDA.”

This year, Ocado became one of the first UK grocers to develop a voice application for Amazon’s Echo devices, while delivery punctuality hit 95% and order accuracy dropped 0.2% to 98.8%. Active customers have increased 11.2% to 645,000, while order volumes have grown 14.3% over the year to 263,000 per week.

Meanwhile the average basket value dropped to £107.20, blamed on the uptake of the Ocado Smart Pass and trend of ordering on mobile. 

Steiner said the business has “ramped up the capacity” at its fulfilment centre at Andover, which opened at the end of 2016, and will be opening its fourth DC in Erith this year. 

“Now is the time to take advantage of our growth opportunities. We will invest to ramp up our new solution in both Erith and Andover and to have the right resources in place to meet growing demand for the Ocado Solutions offer,” explained Steiner. “We believe that taking advantage of these international opportunities now will make our virtuous cycle turn faster in the years ahead and we expect that to translate into higher returns on capital.”

Fiona Cincotta, senior market analyst at City Index, described Ocado’s spike in costs as “disappointing”, saying this could mean Ocado is struggling to source drivers, after the shortage reported last year.

“That's a growing pain and management's ongoing investment in the business makes sense at this juncture,” she added. 

“The capital raising will also put pressure on the shares, but it's always better to pull the trigger on these things when the share price is high and Ocado has grasped the nettle,” she said. 

She explained that recent share-price performance has been down to Ocado’s two partnership deals with Groupe Casino in France and Sobeys in Canada: “The market will be hungry for more of these big scale boosters, especially with an 800-pound gorilla like Amazon breathing down Ocado's neck.”