Shares in online food retailer Ocado (OCDO) fell as much as 7% in early trading, before stabilizing down 2.6% at £18.36 by lunchtime after the firm posted a disappointing trading update for the third quarter.

TALE OF TWO HALVES

Revenues for the retail joint venture with Marks & Spencer (MKS) for the three months to the end of August were 10.6% lower than last year due to tough comparable sales in the same period and another fire at its Erith customer fulfilment centre caused by colliding robots.

In the six weeks to mid-July, sales were only slightly down on 2020, when growth was more than 50%, but due to the disruption caused by the fire sales in the remaining seven weeks of the quarter were down a whopping 19%, even though only 1% of the ‘grid’ was damaged.

In total, the firm reckons it lost around 300,000 customer orders or £35 million in revenues due to the disruption caused by the fire. Despite this, it didn’t suffer any loss of market share according to the latest grocery sales data from Kantar Worldpanel.

COSTS MOUNT UP

On the plus side, customer acquisitions hit a record 64,000 in the first six weeks of the quarter and orders per week jumped 22%, offsetting a 12% fall in the average basket value to £124 against £141 last year.

Also, the Erith facility was back online within a week operating as a spoke for both the Ocado retail business and Morrisons (MRW), while capacity at the Andover and Purfleet CFCs has been expanded and new CFCs at Dordon and Hatfield have come online, so total capacity has increased to over 600,000 orders per week.

However, lost orders from Erith are likely to dent second half operating profits by £10 million and write-offs for stock and other fixed assets will mean another £10 million one-off hit to earnings. Fortunately, the firm’s insurance will cover half the cost so the net impact is estimated to be around £10 million.

The shortage of delivery drivers is pushing up operating costs and the firm is expecting to book an additional £5 million of labour charges in its full year results.

EXPERT VIEW

The fact that Ocado has operated its incredibly complex fully-robotized fulfilment centres without issue for several years tends to get overlooked until two robots collide and catch fire, costing it millions of pounds, points out AJ Bell investment director Russ Mould.

‘It has now suffered two fires caused by robots which is damaging to more than just one quarter’s sales’, adds Mould.

‘Ocado’s business model is dependent on signing up more grocery sellers to use its logistic platform and systems. Any prospective client might look at the considerable disruption caused by seemingly a small accident and think twice about signing up’.

 READ MORE ABOUT OCADO HERE

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account.

Issue Date: 14 Sep 2021