Online grocer Ocado has today posted resilient sales for its first-half period, but an increasingly tough market poses significant challenges going forward.
For the 24 weeks ending May 15th 2011 the retailer recorded its first profit-before-tax of £200,000, compared to a loss of £6.7 million for the same period last year, and gross sales jumped 20.8 per cent year-on-year.
High food inflation and dampened consumer spending meant average order sizes made by the e-tailer’s customers declined 1.5 per cent to £114.09, but a 48 per cent increase in margin to 4.8 per cent meant EBITDA improved significantly to £14.3 million.
Andrew Bracey, Chief Financial Officer of Ocado, said: “Continued sales growth, coupled with operational leverage has led to an increased EBITDA margin and Ocado achieving a pre-tax profit for the first time; achieving profitability clearly demonstrates the operational leverage and efficiency of the Ocado model.”
Ocado has also announced a supply partnership with French grocery giant Carrefour to trial the ‘Reflect de France’ range of authentic French produce in the UK.
Around 100 new lines of own label products were launched during the period, now totalling 350 and over 68 per cent of customer orders now contain at least one of these items
The retailer has done well to prove wrong many of it doubters, who questioned whether it would ever make a profit at the time of its IPO last year, but to keep improving its performance in the months ahead may prove tricky.
Anna Smee, Business Strategist at Hundred Consulting, commented: “Online shopping is now widespread but so, unfortunately, are the major food retailers that offer it, not least Waitrose, which could prove a major threat in core markets as the non-compete agreement comes to an end.
“The major challenge for Ocado is how to reignite its customer acquisition rate, which has flat-lined of late. Ocado is a strong niche brand but it is having real trouble breaking out of its niche.”
In an attempt to increase weekly orders to 180,000, from the 108,350 in the last half, the grocer intends to invest £80 million over the next two years in expanding site capacity.
A second customer fulfilment centre in Dordon, Warwickshire is being constructed to schedule, but Shore Capital analyst Clive Black has questioned whether the distribution site, due to be opened at the end of 2012, will prove to be worth the investment.
“We still struggle with the expenditure of £210 million on a second distribution centre,” Black added.
“Not least to our minds at least because Ocado has not demonstrated that its Hatfield facility is especially profitable and cash generative after nearly a decade of trading in reasonably soft competitive conditions.”