Ocado places brakes on enlargement as on-line grocery demand eases

Ocado has instructed traders it’s going to pause the development of extra automated distribution centres within the UK, the most recent signal of a pullback in demand for on-line grocery supply.

In a current presentation to analysts it stated two new “buyer fulfilment centres” (CFCs) scheduled to open in 2024 and 2025 can be delayed.

“We’ve taken the choice to pause the north-west and south-east CFCs,” chief monetary officer Stephen Daintith stated. “That will change, it’s a pause not a cease, however we predict it’s a smart factor to do given the excess capability we now have as we speak.”

The choice means the gross sales capability of Ocado Retail, the three way partnership with Marks and Spencer, will now attain £3.9bn within the medium time period, somewhat than the £4.5bn beforehand deliberate. Its gross sales final yr had been £2.3bn.

The corporate had already warned it may not speed up a capability enlargement programme put in place after its present services couldn’t be ramped up rapidly sufficient to capitalise on booming demand through the Covid-19 pandemic.

Now the pandemic has waned and many consumers have returned to shops, it has the reverse downside. It expects gross sales to fall this yr for the primary time in its historical past and having opened new warehouses in Essex, Bristol and Luton, it has extra capability than it wants.

Ocado reiterated that it didn’t intend to promote its half-share in Ocado Retail to M&S to lift funds. “That’s not an possibility we’re significantly contemplating,” stated Daintith. “Proper now on the decreased margins . . . wouldn’t be a smart time to promote that enterprise.”

Some analysts are questioning whether or not the slowdown within the UK may have an effect on Ocado’s worldwide options enterprise, which sells its expertise to different meals retailers.

The corporate has agreed to construct greater than 60 CFCs for patrons resembling Kroger within the US, Aeon in Japan and most just lately Lotte in South Korea. The anticipated future money flows from working these underpin Ocado’s £5.4bn market worth.

“If [Ocado clients] are not sure the place on-line demand goes and in regards to the profitability of CFCs, it’s absolutely safer to stay to in-store selecting,” stated Andrew Gwynn at Exane BNP.

He famous that customers of Ocado’s expertise paid based mostly on capability availability somewhat than precise order quantity.

Ocado does present expertise to facilitate in-store selecting, which is way much less environment friendly however makes use of present retailer infrastructure and may rapidly regulate to altering demand. However it’s believed to be decrease margin for the corporate than working automated CFCs.

The corporate’s supporters stated the current disclosures had strengthened their views that the expertise rollout would generate substantial earnings and money in future years.

William Woods at AllianceBernstein stated firm steerage on future revenues and earnings for the options division had been nudged increased and Ocado had reiterated that it didn’t count on to have to lift new funding.

He added that increased inflation and a stronger greenback might increase income and revenue ought to they persist.

There’s a enormous variation in goal share costs amongst analysts. Gwynn has a goal of £3.90, 40 per cent under Ocado’s present share worth, whereas Nick Coulter at Citi has valued the shares at £29 every, simply above the pandemic-era peaks they reached in late 2020 and early 2021.