Ever since it floated on the London Stock Exchange in 2010, Ocado has always been a ‘jam tomorrow’ stock.
The online grocery retail and technology company has consistently argued that online will become the fastest-growing grocery channel in all markets around the world.
As such, investors have asked to be patient, to carry on backing the company as it rolls out its technology and builds new partnerships around the world. The profits, they were promised, will eventually roll in.
A glance at Ocado’s full year results, published on Tuesday, would suggest to the casual reader the company is winning that argument.
It noted: “Online market share has stabilised at materially higher levels following the pandemic [and is more than] 50% higher in the top 20 markets worldwide.
“Industry data forecasts widespread and continued channel growth. For example, Edge Ascential expects online market share in the top 20 markets, globally, to grow by 30% through 2027.”
Unfortunately, investors were unmoved. The market focused not on the optimistic projections for online groceries but on Ocado’s ballooning losses.
A pre-tax loss of £501m for 2022 was up from one of £177m in 2021 and appreciably worse than the £429m loss that analysts had pencilled.
It was the continuation of a long trend in which the red ink has flowed liberally. In 2020, Ocado reported a pre-tax loss of £52.3m. In 2019, it was £214.5m and in 2018 it was £44.4m.
The shares, which have more than halved in the last year, fell by more than 8%. The brief period during the lockdown boom, in which Ocado’s stock market valuation eclipsed that of the market leader Tesco, seems a long time ago. The stock market now values Tesco at nearly four times that of Ocado.
It is fair to say that there is plenty of scepticism around.
Clive Black, retail analyst at the investment bank Shore Capital and a long-standing critic of Ocado, told clients the results were “awful” and represented “a truly dismal performance”.
In a damning note entitled ‘Somewhere over the rainbow’, Mr Black, one of the sector’s most renowned analysts, noted that he did not forecast Ocado’s financial performance because there was “little to no visibility”, pointing out that the company had “persistently missed market, and its house brokers, estimates, with downgrade after downgrade to anticipated losses”.
He went on: “One day in a distant time zone the Ocado Group may be surrounded by the words, meaningful sequential pre-tax profits, who knows, it may even pay Corporation Tax, but one cannot yet see the rainbow, never mind any pot of gold.”
So why did losses widen during 2022?
The most obvious reason is that Ocado’s costs continue to rise more rapidly than its sales. The latter rose by just 0.6%, to £2.5bn, while the former rose by 16.5% to £1.2bn. There were also some £349m worth of accounting charges and there was also a near-14% rise in financing costs.
What really appears to have spooked the market is what has been happening in sales.
There are essentially three strands to Ocado. One is international solutions and logistics – under which it licences its platform, the Ocado Smart Platform (OSP), to, among others, supermarket partners including Kroger in the United States, Casino in France, Lotte in South Korea, Alcampo in Spain and Coles in Australia.
The other is UK solutions and logistics, which services both Morrisons as a partner and also the third strand of the business, Ocado Retail. This is the part of the business familiar to most consumers and is a 50/50 joint venture with Marks & Spencer.
It is this latter division that has unnerved the market. Ocado Retail’s sales fell during the year by 3.8% to £2.2bn, which the company blamed on “a challenging market as we see the unwind of the COVID impact and normalised consumer behaviour, leading to smaller baskets, exacerbated by the cost-of-living crisis”.
In mitigation, the company noted that the number of active customers at Ocado Retail rose by 13% during the year, to 940,000 customers, while the average number of orders received per week rose by 5.6% to 377,000. Unfortunately, the average size of each shop fell by 8.5% to £118, while the number of individual items fell on average from 52 to 46.
That was not in the script and runs contrary to the promises of Ocado’s co-founder and chief executive, Tim Steiner, that more people would increasingly spend more with the company as online grocery shopping grows in popularity.
Mr Steiner was insisting on Tuesday that, as unfavourable comparisons to its turbo-charged performance during the pandemic fade away and inflationary pressures recede, the benefits of signing up more customers would come through.
But he has a problem in that, rightly or wrongly, Ocado is perceived by many shoppers as expensive. Ocado plans to challenge this by benchmarking the price of 10,000 of its items against those of Tesco, promising customers money off their next shop if Ocado proves more expensive, but it faces an uphill battle in changing perceptions.
The real jam, of course, is offered in international solutions and logistics. If Ocado can truly build scale and carry on building relationships around the world then, if online grocery shopping really does take off, it will reap the rewards. It is not there yet, though: Mr Black pointed out today the division is losing almost as much as it is recording in sales.
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He added: “International Solutions sales, where the group sees the excitement, amounted to £148m. To put the latter into context, a top Tesco hypermarket in the UK will report over £100m of sales per year.”
Financially speaking, things will get worse before they get better, with another big loss expected this year.
Capital expenditure, which rose by 17% to £797m during the last year, is likely to remain high while some analysts fret that, with net debt more than doubling during the year to £577m, a cash call will be required on the heels of last year’s £575m issue of new shares.
Those financial pressures have also obliged the company to pause the rollout of new distribution centres in the UK.
Ocado remains an admirable business in many ways. Few enterprises of this kind have been built from scratch and certainly not with its technology. Its heavy investment in research and development is something that the UK government would love to see replicated across British business. And its retail offering, as all Ocado customers will know, continues to offer a high class service.
None of this, however, looks like benefiting shareholders in the near term.
