UK: Investment pushes Ocado back into the red despite sales growth

An Ocado delivery van

An Ocado delivery van - Credit: PA

Internet retailer Ocado slumped back into the red today despite rising half-year sales as it took a major hit from the opening of new warehouses.

Ocado, chaired by former Marks & Spencer boss Sir Stuart Rose, said growing customer numbers boosted revenues by 15% to £382.7 million during the 24 weeks to May 19.

But the cost of opening distribution centres in Dordon, Warwickshire and Welwyn Garden City, Hertfordshire helped drag it to pre-tax losses of £3.8m from maiden profits of £200,000 a year earlier.

Its expanded operations will be used to support a tie-up with supermarket Morrisons, which plans to begin delivering groceries to customers’ homes by the end of this year.

Ocado recently struck a 25-year deal for the UK’s fourth-biggest supermarket to use its technology and operations, including delivering groceries from Dordon through a Morrisons-liveried fleet.


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Ocado is also developing a new online pet store, Fetch.co.uk, and recently started testing the website.

The company’s active customers increased to 360,000 from 337,000 a year earlier, while average orders rose to 139,000 per week from 122,000.

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Chief executive Tim Steiner said that while the grocery market remains tough the company was well placed to take advantage of structural changes in the industry as more customers choose online delivery for their grocery shopping.

The group now stocks more than 31,000 products, including some of its own label goods. Customers’ average basket size grew to £114.90 from £113.10 a year earlier.

Bradford-based Morrisons has lagged behind its major rivals because it lacks a meaningful presence in the two fastest growing sectors of the market - online and convenience stores.

Morrisons will make an initial payment of up to £170 million to Ocado to buy Dordon and associated handling equipment, as well as a licence and integration fee.

A further £46 million will be invested to expand Dordon to accommodate the Morrisons range, integrate with Morrisons systems and establish a network of delivery spokes.

On an annual basis, Morrisons will pay service costs and a contribution to research and distribution expenditure. Ocado also has a distribution site at Hatfield.

Mr Steiner said the tie-up leaves Ocado well placed to grow and is an “endorsement of our business model”.

However, the Morrisons deal has proved controversial because Ocado is already linked with Waitrose, exclusively delivering the supermarket’s products.

Ocado today insisted its rights and obligations to source products from Waitrose “remain unaffected” by the new deal.

Shareholders will vote on the Morrisons agreement at a meeting on July 18.

Shares in the group have more than quadrupled over the past year and Shore Capital analyst Clive Black said Ocado has just gone through its most successful reporting period as a quoted company.

He said: “Such a performance will have come as a welcome relief for what has been a long-standing saga of disappointment and let down.”

But he added: “This remains a business that continues to be valued on unsubstantiated potential rather than cash flows with high visibility.”

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