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Ocado Group: share price heading down on labour constraints and Erith fire


The market has not been responding well this morning to the latest figures out from Ocado Group (LSE:OCDO). Shares fell from 1905 to briefly hit 1780 as investors became disenchanted. There had been some expectation that the Ocado numbers would not be impressive going into the week – shares are off more than 12% from their peak this month.

Ocado Group’ss Q3 retail revenues were down 10.6% y/y, however average orders remain robust at 338,000 per a week. Ocado is retaining customer loyalty but it seems many people are simply spending less on food now they are out of the house more and commuting more regularly. This is starting to look like a post-lockdown hangover for Ocado, which was the darling of investors last year.

Ocado Retail sees 10% drop in Q3 revenue

Ocado Retail – which is 50% owned by Marks & Spencer – saw third quarter revenue fall 10.6% to £517.5m. Revenue fell 1.8% in the first six weeks. Following the fire at the Erith fulfilment centre in July, lost capacity and sales meant revenue fell 19% for the rest of the period.

Ocado processed 338,000 orders a week, up 1.4% on last year. New capacity means the group can now process up to 600,000 orders a week, and announced plans to increase this to 700,000 in 2022-2023.

The total cost of the fire, not covered by insurance, is expected to be around £10m. Rising labour costs, particularly in LGV and delivery drivers, will cost up to £5m at the full year. The group said Ocado Retail “expects to deliver strong revenue growth in FY22”.

“Ocado is also facing a squeeze,” said Ross Hindle, retail sector analyst at Third Bridge. “The big four grocers are gaining ground on home delivery whilst a new breed of on-demand food delivery start-ups also nibble at market share. Ocado is now aiming to increase capacity to 700,000 deliveries per week by 2022 as it looks to cement its place as the go-to online retailer.”

Labour constraints remain a key risk highlighted by management. Labour constraints have plagued companies like Ocado since the start of 2021 and only worsened. There have also been food shortages as farmers and processors struggle with the same issues.

“Some 300,000 orders were lost as a result of the Erith fire, despite Ocado’s best efforts to minimise disruption,” said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown. “This kind of operational problem is something the group can ill afford. As we head into the most important trading period of the retailer’s year, it’s crucial that all dents have been ironed out, so it can fully capitalise on the festive season.”

M&S partnership: shining light for Ocado?

The M&S partnership continues to be a shining light for Ocado, with M&S products representing c.29%of the basket. While this expansion is impressive it is also margin dilutive.

Ocado sells the majority of its own-label products, for which it makes a much higher margin relative to M&S goods. “The experts we are speaking to believe the sweet spot for M&S products is around 25% of the Ocado basket, a point at which M&S products can still attract new customers but Ocado’s bottom line remains intact,” Hindle at Third Bridge explained.

Ocado prides itself on being a more premium grocer; if it can’t get enough of the right stock on its virtual shelves, it could reduce revenue more so than for other supermarkets. The increased staff costs could cost up to £5m at the full year, which together with an uncertain trading outlook, means profits could suffer.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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