ii view: Ocado flags permanent shift to online grocery

Tough pandemic comparatives lie ahead but a 40% hike in 2021 capacity will be tough for rivals to match. 

First-quarter trading update to 28 February

• Retail revenue up 40% to £599 million
• Average orders per week up 2.5% to 329,000

Head of the retail division Melanie Smith said:

"Over the past year, large numbers of UK consumers have made a permanent shift to online grocery shopping. Ocado Retail is best placed to serve these customers as we continue to improve the customer experience through the joint venture with M&S, adding new products, offering greater value, and maintaining high customer service levels. 

“Q2 2021 represents the one-year anniversary of the start of the Covid-19 pandemic which accelerated the demand for online grocery; while this year's quarterly sales figures will reflect the year-on-year comparisons with periods of full lockdown, we expect strong growth over the coming years as we continue to lead the charge in changing the UK grocery landscape, for good."

ii round-up:

Ocado (LSE:OCDO) operates via the two divisions of Retail and Solutions. 

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer (LSE:MKS). It delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own brand products and a growing non-food selection. 

Solutions is responsible for helping other retailers with their online offerings using its Ocado Smart Platform software and robot technology. Current retail partners include Morrison's (LSE:MRW) in the UK, Kroger in the US and Coles in Australia. 

For a round-up of this latest trading update, please click here.

ii view:

Each order received by the retail joint venture is packed in one of four distribution centres using the group’s own smart platform software and robot technology. Ocado recently opened a mini–Customer Fulfilment Centre (CFC) in Bristol and plans both an opening at Purfleet and a re-opening of its fire hit Andover centre later this year. These will add an expected 40% to its overall capacity. Mini CFCs also bring potentially shorter lead times for delivery. 

Many UK consumers, particularly in the early months of the pandemic, were unable to obtain delivery slots either with Ocado or rivals such as Tesco (LSE:TSCO) given a lack of industry capacity. Ocado is clearly working hard to expand its own ability. Some consumers, having used delivery services during the pandemic from either Ocado or its rivals, may not return wholeheartedly to store shops ever again.

For investors, Ocado’s technology fuelled CFCs are quicker and more efficient than some rivals use of traditional store picking. Potential later-in-the-day delivery services could also remove some sales from takeaway delivery services like Just Eat (LSE:JET). Outsourcing of its technology to other retailers internationally via its solutions division also opens up opportunities elsewhere, potentially taking away sales from less efficient retailers across the world and helping those paying to use Ocado’s technology. 

That said, a legal claim over patents by Norwegian robotics company AutoStore remains in the background. Despite management’s expectations for second-quarter retail division sales growth, comparatives will become harder over 2021 as future growth competes with the clear boost from the pandemic. And a nearer 60% jump in the share price compared to a 23% rise for say Sainsbury's (LSE:SBRY) shares since pandemic lows in March 2020, arguably attempts to price in some of its advantages. In all, while 2021 may not witness the growth of 2020, for long-term fans of the company there is still much to play for. 

Positives: 

• Efficient technology based packing of customer orders
• UK capacity should grow by 40% over 2021

Negatives:

• Legal claim over patents by Norwegian robotics company AutoStore
• Doesn’t pay a dividend

The average rating of stock market analysts:

Weak hold