Ocado has warned that annual sales will drop because customers are trading down to value products and buying less overall amid a worsening cost-of-living crisis.
The online grocer, which is owned partly by Marks & Spencer, said sales rose 2.7% from a year ago in the 13 weeks to 28 August, an improvement from the drop in the previous quarter.
However, faced with soaring energy bills and higher food prices, shoppers are putting less in their baskets and looking for cheaper products. The value of the average basket fell 6%, from £123 to £116.
Tim Steiner, chief executive, said: “Customers are trading down in basket size, which also means they occasionally trade down in pack size, and customers will move out of certain branded products to own-label or they’ll move from one brand to another brand, or they’ll move, for example, from steak to mince or from fresh tuna to canned tuna.”
Steiner said basket sizes were back to where they were before the pandemic, even though people were working more days from home than in the office, which should translate into a rise in online grocery shopping.
“We would expect basket sizes to be larger than they were pre-pandemic given how much more activity is undertaken at home,” he said.
“What we’re not sure about is: are we still in a post-Covid euphoric eating out and vacationing trend, with some of the more affluent households [spending] stored-up savings from the pandemic and therefore will basket sizes grow again to reflect the more consumption from home plus more work from home? It’s difficult to know at the minute.”
Steiner declined to comment on Liz Truss’s energy support package and sweeping tax cuts, which are set to benefit the richest households twice as much as the poorest, according to the Resolution Foundation.
“Notwithstanding positive customer growth, the accelerating trading down and smaller baskets, particularly over the last few weeks, mean that we now expect to see a small sales decline in 2022 and close to break-even Ebitda [earnings before interest, tax, depreciation and amortisation],” Ocado said. Analysts had pencilled in 5% sales growth for the full year, and an underlying profit of £48m.
Shares closed down nearly 15%, making Ocado the FTSE 100’s biggest faller.
In May, Ocado warned that its sales growth would be less than half the rate it had hoped for as the cost-of-living crisis, coupled with a return to office work and dining out, hit trade. The picture has deteriorated further since then.
The company has expanded its cheaper own-label range of 750 products by 75 items. Its average selling price has increased by 5% year on year, which is made up of a 7% inflationary increase in food prices offset by a 2% decline related to customers choosing lower-priced alternative products.
Customer numbers increased by 23% over the 13-week period as the company ran more promotions, such as £20 off new customers’ first shop and free delivery.
Ocado said higher costs, mainly from energy and dry ice, would weigh on profits in its fourth quarter. The cost of electricity is about three times what it was last year, and fuel costs for the year are expected to be about 15% higher. At similar levels of use, this adds £20-25m in costs.
The price of dry ice, used to transport frozen products such as ice-cream, has increased dramatically, which will add a further £15-20m in annualised costs, although the business is exploring alternatives to dry ice, or carbon dioxide. It is a by-product of fertiliser manufacture. Steiner said the price had tripled from £200 to £600 during the war in Ukraine, and further shot up to £4,000 a kg more recently because of plant closures.
Food and drink industry bodies have warned of potential carbon dioxide shortages, after one of the UK’s largest suppliers of the gas said last month that surging natural gas costs were forcing it to pause production.
Ocado has built new warehouses and the Bicester centre is now open, one of four new centres since early 2021 that mean the company can fulfil 600,000 orders a week. It receives 374,000 orders a week, in stark contrast with the pandemic when it struggled to keep up with customer demand. Ocado also provides the technology to build hi-tech warehouses for overseas retailers.
