Ocado expects revenues to fall as order sizes decline

Ocado Retail has cut its full-year sales and profit expectations, as the average size of orders falls and costs rise.

The online supermarket said on Tuesday it expected to see “a small decline” in sales for the year to November, and “close to break-even” underlying profitability as operating costs rise and customers spend frugally in response to soaring inflation.

The company, a joint venture between Ocado Group and Marks and Spencer, previously expected sales to grow in the mid-single digits. Analysts had been expecting underlying profit of about £48mn and sales growth of about 5 per cent for the full year.

Shares in the group, which peaked at above £28 during the pandemic, were down 9 per cent at £7.23 in early dealings on Tuesday.

Third-quarter sales were up 2.3 per cent on last year and 42 per cent higher than in the equivalent quarter before the pandemic. Customer numbers grew 23 per cent year on year after the company ran more promotions — its website is offering new customers £20 off their first shop plus free delivery.

It fulfilled 10.7 per cent more orders in the quarter, helped by growth in capacity, but the average order value declined 6 per cent to £116 as consumers picked cheaper items in response to growing pressure on household incomes.

Ocado also faces increases in the price of fuel, electricity and dry ice, which is used in the transport of frozen products. These increases could add as much £45mn to its annual cost base and Ocado said it was “looking at alternatives” to dry ice.

Capacity is expected to hit 600,000 orders a week by the end of this year after the company opened several new automated fulfilment centres. Ocado currently dispatches about 374,000 orders a week.

This is the reverse situation to that during the Covid-19 pandemic, when the company did not have enough capacity to satisfy sharply increased demand. Ocado said that while the spare capacity gave it room to grow, it represented “a cost to the business in the short term”.