How will Ocado, and pureplays, annualise a year like no other?

Date : 15 December 2020

Simon Mayhew

Head of Online Retail Insight

A year like no other

Back in March, Ocado’s website was down, its app had been pulled, and commentators were hammering the business for its failure to respond to demand, and the inflexibility of its dark stores.

But as we’ve seen many times before, Ocado has a habit of proving the doubters wrong.

By the end of the year, Ocado Retail delivered a 35% year-on-year (YoY) increase in sales, driven by average order sizes increasing c.25% YoY, (to £141 in Q3, and £131 in Q4). Its customer fulfilment centres (CFCs) have been operating at maximum capacity, hitting 360k orders per week in the final quarter.

Source: Ocado.com

Looking at profit, it’s had to prioritise shoppers, so, despite unprecedented demand, its active customer numbers actually fell (14)% YoY in the first half. Its marketing costs will never be lower. It’s also stopped new sign ups to its free delivery Smart Pass, therefore channeling customers into one-off delivery fees, as high as £6.50 per slot. Again, its delivery income per customer will never be higher. And in last week’s Q4 results announcement, Group EBITDA is expected to be over £70m, versus £43m last year. It’s truly a year like no other.

So how will Ocado annualise 2020?

Ocado is a business that has consistently grown ahead of the market. Its expertise in online and volume growth has enabled it to secure high levels of supplier support, (in 2019, it was 3.9% of total revenue). However, this year, it’s been the bricks and clicks retailers that could provide suppliers with volume growth. Using their stores as fulfilment centres and rolling out click and collect, retailers such as Tesco have increased online order capacity by c.63% (versus pre-COVID-19) to 1.3m orders per week.

Source: Ocado Technology

Ocado is literally building on 2020. It will open a new mini-CFC in Bristol in early 2021, offering 30k orders per week. In the Autumn, it will re-open a CFC in Andover, eventually offering 60k orders per week, as well as a new CFC in Purfleet, Essex, capable of 85k orders per week. Ocado Retail’s CEO Melanie Smith stated in the Q4 results, “three warehouses opening in 2021… will ultimately give us 40% more capacity to our business”. However, two of the CFCs don’t open until the back end of 2021 and capacity increases take time to build. Look at Erith CFC, it opened in 2018, with a capacity of 200k orders/ week, and two years later it’s doing 130k.

So, let’s assume that a vaccine is rolled out by the middle of next year, and in Q3 and Q4, Ocado will annualise those huge basket sizes and order numbers. Will the CFCs open in time? Will they get to capacity quickly enough? Or will Ocado Retail be in decline for the first time ever?

Always delivers…

One thing is for certain, don’t underestimate Ocado.

In an interview to commemorate the Group being 20 years old, CEO Tim Steiner discusses how he had to lend the business money to complete payroll and avoid a spiral that would culminate in the business no longer existing. Today the business has a market capitalization of £16.5bn.

Ocado consistently innovates to survive and succeed.

Will we start to see it utilize physical stores to reach more shoppers? Standalone city centre click and collect points, similar to retailers in France? It’s got a stake in Myrmex, a technology company which is working on such a solution. It’s obviously in a joint venture with M&S, so why wouldn’t it open grocery click and collect points in, and outside of stores. Casino’s CFC in Paris is being used to fulfil store orders.

History says it will innovate, change, and once again prove the doubters wrong.  

In our new and updated Ocado Strategic Outlook we review the impact of COVID 19 and answer the big questions for the Ocado Group and Retail division. IGD Retail Analysis subscribers can click here to access the report and click here for all the latest Ocado news.