Ocado poised to tap growth in UK online grocery market

Ocado: shift in consumer behaviour

Ocado: shift in consumer behaviour

Ocado claims it is well placed to exploit the expansion in online grocery shopping in the UK.

Announcing a 16.6% rise in gross sales for the 52 weeks ending 27 November 2011, CEO Tim Steiner, said: “Against the backdrop of a weak UK economy, we have continued to see the development of the online grocery retail market.

“We believe this growth is evidence of a structural shift in consumer behaviour and we will continue to see an expansion of the online grocery retail market. We will continue to pursue our existing strategy in 2012 to improve what we offer our customers and increase our capacity to meet growing demand.

“It is our mission to make sure that customers continue to regard Ocado as the home of the market-leading offer in online grocery shopping.”

But retail consultancy Retail Vision poured cold water on Ocado’s performance.

Managing director, John Ibbotson, said: “Despite a brief uptick in pre-Christmas sales, it has been a pretty tough year for Ocado.

“Much will be made of the 16.6% increase in gross sales over 2011. This is a very respectable figure, and is better than that of its rivals.

“But the average value of each order is down, and the firm is still making losses,” he said.

While Ocado’s average orders per week increased by 18.6% to 110,219 (2010: 92,916), the average order size decreased by 1.7% to £112.15 (2010: £114.06) and the business made a pre-tax loss of £2.4m.

Ibbotson said there were still question marks over Ocado’s business model.

“Without the infrastructure advantages of its established supermarket rivals, it always faced a daunting challenge,” he said.

“The fact is the cost of setting up a business like this from scratch is vast. Ocado is spending £210m on one distribution centre in the Midlands alone.

“With its sales being squeezed by cut-throat competition from both Tesco and Waitrose, such punitive capital costs may one day overwhelm Ocado.

“For months there were rumours that Amazon was going to branch out into food by buying the firm.

“Though Ocado’s share price fell to a third of its floatation level last month, the prospect of such a takeover now appears to be receding.

“The CEO insists Ocado is not for sale and 2011’s steady sales growth is sustainable.

“But the announcement last week of the departure of its finance director hardly suggests a happy ship, and the firm still has a mountain to climb.”

Industry figures support Ocado’s faith in online sales growth, however.

According to the IGD, online will be the fastest channel in UK grocery and is set to almost double in value in the next five years to £11.2bn (up from £5.9bn in 2011).

Further, the IGD found 4% of shoppers expect to do more of their food and grocery shopping online over the next 12 months and 44% intend to shop online for at least some of their food and groceries within five to 10 years’ time, compared to just 17% who are doing so in 2011.

A third of current non-users also predict they will shop online for food and groceries in the future.

But, while online is the fastest growing channel, it is still a relatively small share of the overall food and grocery market; worth 3.8% of the overall UK food and grocery market in 2011 and forecast to be worth 6.1% of the overall UK market by 2016.