Ocado feels heat as cash-strapped shoppers switch to cheaper products: reaction
Shoppers have cut back their spending as they try to offset the growing cost of living, online grocery business Ocado has revealed.
The average basket that customers checked out reduced by 6 per cent to £116 in the 13 weeks to the end of August, and has shrunk even more rapidly since. A large part of the change was due to customers switching to cheaper alternative products, Ocado said.
Chief executive Tim Steiner said: “We remain focused on providing Ocado Retail customers with the best possible value to help them navigate the cost-of-living crisis, and are encouraged by the positive underlying trends in the business which underline the value of Ocado’s differentiated proposition to customers.”
Meanwhile, the business itself is also feeling the pinch, warning of a £20 million to £25m additional hit from its annual electricity and fuel bill. Electricity prices have tripled, while fuel is up 15 per cent, Ocado warned.
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The cost of dry ice - vital for chilling its products - also soared and will add between £15m and £20m to its annual bill.
Bosses said they are exploring alternatives to dry ice, but added that increased costs are likely to weigh on the group’s profitability in the fourth quarter.
However, on the upside, the order book looks healthy, with the number of orders per week rising by nearly 11 per cent from a year ago to 374,000.
It shows that a record number of new customers are using the company - active customer numbers rose 23 per cent year on year to 946,000.
Third-quarter sales lifted 2.7 per cent to £532m as a result, and are up 42 per cent compared with before the pandemic. Even stronger growth is expected in the fourth quarter, Ocado said.
Steiner added: “As we have seen in (the third quarter), customer numbers are sharply up as consumers either switch from other providers or try online grocery for the first time; underlying productivity in fulfilment and the last mile continues to improve.”
Adam Vettese, analyst at social investing network eToro, said: “Ocado Retail’s latest update feels a little like one step forward and two steps back.
“While the online supermarket has grown customer numbers by an impressive 23 per cent year-on-year, soaring inflation and falling real wages mean that customers are opting for cheaper brands and putting less in their baskets.
“On top of that, Ocado, like all firms, is contending with sky-high energy and fuel bills, which is acting as a major drag on profitability.”
Julie Palmer, a partner at Begbies Traynor, the corporate restructuring specialist, said: “Ocado is facing a chilling and unusual effect of inflation, with rising prices of dry ice used to cool customers’ shopping during deliveries sending a shiver through the online grocer’s finances.
“The question for Ocado is the extent to which customers continue to splash out for the privilege of having their weekly shops delivered to their doorsteps. The online grocery trend is here to stay but many cash-strapped consumers may instead trade down from Ocado to cheaper alternatives such as Asda and Morrisons.”