Wednesday, 19 September 2012

Ocado interim statement: not much to get excited about

The Ocado 12 week statement is out this morning.

And there isn't very much to get excited about. I argued in a previous post that the fundamental problem with Ocado's business model is that it is designed to break even, not make a profit. As the business scales up, the break-even scales up with it: the profit margin on each delivery is almost exactly equal to the cost of making it. Sales continue to grow steadily (9.9% year-on-year), but there are no obvious pointers to profit growing with them.

There are some small hints for those who want to take an optimistic view. "We have been able to preserve our margins during the quarter" is essential news for a business model so finely balanced between profit and loss. "The Hatfield Customer Fulfilment Centre continues to operate with improved efficiency... enabled us to remove all remaining... trolley picking" means that costs-per-order should reduce slightly.

More interesting is a rise in the average basket size from £111.08 to £112.44 (1.2% year-on-year). On the one hand, this is at least reversing the downward trend. On the other hand, this compares with Food CPI rise of 4.5% (in the latest available figures from the ONS i.e. March 2012). The implication is that the number of items-per-basket might actually have dropped. The quarterly interim statements don't quote this number, so we'll have to wait for the end-of-year results. If the items-per-basket figures really has dropped (again!) , this is very bad news.

For this business to ever become profitable, items-per-basket must rise. On a rough calculation, for profit to rise to a reasonable 9% of sales, average items-per-basket needs to rise by about 25 items. This is a huge hurdle, and the signs continue to point the wrong way. A drop in average items-per-basket also tends to suggest that the strategy of moving into non-food is not exactly flying. While this is not exactly a surprise, given how competitive online non-food is in the UK, it's a pillar of Ocado's published strategy and it doesn't look like it's working yet. Another key item of data to look for in the year-end figures.

So all-in-all: no news is bad news.

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