Doubts persist about Ocado’s Waitrose contract

By Rod Addy

- Last updated on GMT

Waitrose competes with Ocado, with initiatives such as Click & Collect
Waitrose competes with Ocado, with initiatives such as Click & Collect

Related tags Supermarket Online shopping Ocado

Fears remain over the long-term viability of Ocado’s contract with Waitrose as the upmarket supermarket looks set to develop as a direct competitor to the online retailer, a leading analyst claims.

Commenting on a trading statement issued by Ocado on December 11, Clive Black, director and head of research at Shore Capital, said: “A decision to serve notice by Waitrose, which is now a mainstream competitor to Ocado, would be more than a body blow in our view.”

In October, Waitrose began trialling an initiative called Click & Collect, enabling online shoppers to pick up their purchases from lockers at tube stations and Gatwick Airport.

While Ocado’s sales had risen in its fourth financial quarter (Q4), it exhibited several worrying signs, said Black. First, its average order size continued to fall, down 1.7% from £111.64 to £109.74.

Management had not commented on the business’s profitability and there were no announcements on further tie-ups, while margins for existing contracts “have not moved the profit dial”​, he said.

‘Growing concern’

In addition, the continued price war between the major supermarkets was “a growing concern”.

“The business model remains flawed on the latter front to our minds as the cost of the last mile gobbles up margin,” ​Black added.

Neil Saunders, md of retail analyst Conlumino took a different view. He stressed that Ocado had increased the average number of weekly orders it was taking by 16.4% to 177,000 across the year.

Ocado’s discount for new shoppers deliberately ate into initial profits from first-time customers, but conversion to more profitable regular shoppers was strong, he said.

The company’s online shopping technology was easy to use and customer-focused, encouraging their loyalty, said Saunders. Scan & Shop, which enabled consumers to scan product barcodes to add them directly to their baskets, was one example he singled out.

‘Tough grocery market’

“In the context of a very tough grocery market, Ocado has posted a pleasing set of numbers that demonstrate the continued attractiveness of its proposition to consumers,” ​he said.

“Looking ahead we remain confident that Ocado can continue to grow its share of the market and to keep up the pace of new customer acquisition. That said, if the grocery price war intensifies Ocado may well find its own margins under pressure because of its price matching scheme.

“This makes the policy of broadening the range to include more own brand and non-food products more critical than ever.”

In its trading update for the 16 weeks to November 30, Ocado reported net retail sales had risen by 14.9%, from £271M to £311.4M, a slight slowdown on the full year rate, Black observed. Revenues had increased by 15.3% in the 52 weeks to December 1, from £843M to £972.4M, it said.

Such growth was good in a very challenging market, said Black.

Ocado ceo Tim Steiner said he was “pleased”​ with the results, adding: “We remain committed to constantly improving the quality of the proposition to customers, which we believe will support continued growth, and although we anticipate the retail environment to remain challenging, we expect to continue growing sales slightly ahead of the online grocery market.”

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