The problem with Ocado’s business model, say the sceptics, is that it’s too damned inflexible. They have a point.
In the two pandemic-affected years, Ocado Retail – the UK business that these days is a 50/50 joint venture with Marks & Spencer – achieved top-line earnings (pre-interest, tax and amortisation) of £148m and then £150m. The numbers would have even better if only more warehouses had been available to meet booming online demand during the long months of lockdown. And this year? Tuesday’s update was the second downwards revision to forecasts since March and said mere break-even was on the cards. From £150m to zero in 12 months.
Many of the underlying factors will probably soon afflict mainstream supermarkets: customers trading down and basket sizes getting smaller. Then there’s the squeeze on the cost base from energy and fuel and, oddly, the bill for dry ice used to chill frozen goods in the vans.
But the uniquely Ocado factors relate to the model. Having had too little capacity during Covid, the business now has too much as new warehouses have come on stream. The business will soon have the ability to deliver 600,000 orders a week but dispatched only 374,000 a week in the latest quarter. “This growth capacity represents a cost to the business in the short term,” said the statement. You bet: expensively built robots are standing idle, presumably twiddling their electronic picking arms.
A cheerful view says short-term overcapacity doesn’t matter terribly. Demand will catch up eventually because online’s share of the grocery market is still growing. In any case, runs the argument, the real value and action at Ocado – the group, as opposed to the UK joint venture – lies in the overseas adventures, meaning the “solutions” deals with foreign supermarket chains.
Well, yes, if you trust the pitch from the boardroom that group-wide earnings of £750m will arrive within four to six years, then a local upset in the UK can indeed be dismissed as a temporary hiccup. But it is starting to look as if the market is taking events more seriously.
The share price, down 15% on Tuesday, is 679p, having been £28 in early 2021 when investors were seized by the notion that lockdown had demonstrated the inherent superiority of a centralised online grocery model. The world looks different now. Indeed, the share price takes the stock back to the days before Ocado signed its supposedly game-changing deal with the US chain Kroger.
The blurry “four to six years” horizon allows time for sentiment to swing again. Equally, though, faith in Ocado’s global revolution feels increasingly fragile. The UK retail joint venture may be, in theory, a valuation irrelevance but it also serves as the advertisement of the model. Like the share price, it is not screaming resilience.
Reasons for Fed to soften on inflation are virtually nil
So much for “the Fed pivot”, the ludicrously premature idea that inflation would soon be tamed, allowing the US Federal Reserve to soften its hawkish stance on rate rises. August’s inflation numbers arrived considerably higher than outsiders had forecast. A three-quarter-point increase in US rates now looks virtually certain this month – and the same is possible in November.
The annual rate of US headline inflation, it should be said, nudged lower to 8.3%, from 8.5% in July, but the expectation was for 8.1% as fuel prices had fallen. Instead, the price of everything from housing costs to health insurance to cars is proving stickier than feared. Core inflation was up.
The scope for the Fed to glimpse reasons to soften was virtually nil. Rather, there were strong arguments to maintain the rhetoric about bearing down “forcefully” on inflation. The risk, of course, is that the US economy tips into recession, which is a real possibility, but the recent signalling from the Fed chair, Jerome Powell, could hardly have been clearer. “We need to keep at it until the job is done,” he said earlier this month. He may just mean it.
Financial markets, having rallied hard in the run-up to the Tuesday’s numbers, were obliged to reverse. The dollar rose and shares fell. The pivot will arrive eventually but it has always looked to be a 2023 event. Inflation can hang around; we should not be surprised.
