- Full year sales and EBITDA guidance lowered
- Customer numbers up but basket size shrinks
- Discounters taking greater market share
Online grocery delivery firm Ocado Retail, the joint venture between Ocado Group (OCDO) and Marks & Spencer (MKS), published a third quarter trading update with a warning that ‘trading down’ by consumers meant it would miss its full year financial targets.
The news sent shares in Ocado Group down by 13% to 690p, making it the worst performer in the FTSE 100, while M&S shares shed 3% to 123p.
CUSTOMERS SEEKING VALUE
The online retailer posted sales of £532 million for the three months to August, a 2.7% increase on the same period of 2021 and 42% higher than the third quarter of 2019, demonstrating the scale of the structural shift to online grocery shopping.
The number of active customers grew 23% to almost 950,000, driving an increase in average orders per week of 10.7%, but while orders have grown, customers are reducing their basket size and are increasingly looking for value-for-money products due to the cost of living crisis.
As a result, the value of the average basket fell 6% to £116 during the quarter with the trend accelerating over the summer.
Ocado’s response has been to try to keep prices down and expand its own-brand ‘value’ range, but cost headwinds are eating into its margins.
The combination of these trends means the firm now sees sales falling slightly this year instead of rising by low single digits and EBITDA (earnings before interest, taxes, depreciation and amortization) ‘close to break even’ instead of a low single-digit margin.
Clive Black, head of research at Shore Capital, noted that for all its advanced technology and ‘industry-leading service levels’ Ocado Retail was still loss-making after 22 years of trading, and suggested M&S would be keen to ‘get a grip of matters’ and improve its financial performance, which also impacts its own profit and loss accounts.
DISCOUNTERS WINNING
Today’s announcement coincided with the release of the latest grocery market sales and market share data from consultants Kantar, which provided more colour on current trends.
Consistent with Ocado’s observation that customers were trading down more in recent weeks, Kantar revealed that in the 12 weeks to the start of September supermarkets sales of the cheapest own-label products were up 33% on last year.
Over the last four weeks, spending on all retailer own-label lines was nearly £400 million higher than a year ago accounting for more than 50% of all grocery spending.
Shoppers are also broadening the range of stores they visit with Aldi sales up 18.7% over the last 12 weeks and Lidl sales up 20.9% compared with an average increase of 3.8% across the sector.
Such has been the success of the discounters that Aldi has now overtaken Morrison to become the fourth largest UK grocer with a 9.3% share of the market.
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