According to Shore Capital analysts Clive Black and Darren Shirley the internet grocer Ocado has reported “far from inspiring” Q3 data for its November 2012 to year-end update.
Shore Capital forecast sales for the grocer to be up 13% on last year, but Ocado has reported gross sales of +9.9% and an average order size of £112.44, which is slightly up year-on-year (yoy). And despite the positive figures, Shore Capital commented that a decline in momentum was worrying.
Black and Shirley said: “Despite all of this activity Ocado is forecast to make very little money in yet another year and its performance continues to be underwhelming. Following this update, we will probably be downgrading our H2 2011/12 sales expectation from 17.6% to 13-15%.
The grocer did report that sales for the summer were likely to be poor due to the Queen’s Diamond Jubilee and the London Olympics. However, Black and Shirley said: “Albeit we did not sense [that] gridlock prevailed in the Capital and, if anything, it was a time of family gatherings that may have suited Ocado in its core market; traffic in Liverpool wasn’t too bad either.”
Many of the problems are down to the company’s business model “lacking compulsion”, Shirley and Black said, which is potentially flawed and increasingly likely to not deliver any form of reward for investors any time soon.
In the minds of Black and Shirley one of the reasons Ocado is not performing so well is down to Waitrose, which they said was the elephant in Ocado’s room. The competition between one of Britain’s “most popular” supermarkets and Ocado is strong and Waitrose’s online sales were shown to have grown by 50% in a recent update. The fact that Ocado delivers a lot of Waitrose stock also hampered things, they said.
Black and Shirley explained that competition in the online grocery market was hotting up in general and they expect Marks & Spencer, as well as Morrisons, to enter the market soon, which will add pressure on Ocado. Interest in ‘Click and Collect’ from Tesco and Sainsbury’s is also changing the way consumers shop online and could cause further difficulties for Ocado, Black and Shirley predicted.
They said: “Sadly, we do not see a bright future for Ocado. As well as a far from stellar top-line progression, the business just structurally struggles to build margins.
“Ocado has a very bespoke fulfilment process. Much credit is, and should be, given to the technical progress made by management. In many ways it is fantastic. However, such is its bespoke nature, we question its applicability to other businesses; never mind the fact that the business depends upon and is contracted to Waitrose.”