Ocado returns to profitability but continues to suffer from low basket sizes

British online grocery retailer Ocado has returned to underlying profit in its first half and stuck to its guidance, though it continues to suffer from low basket sizes.

Ocado on Tuesday (18) released results showing group revenue up 8.6 per cent to £1.4 billion, keeping its guidance for the first half of the year, returning to underlying profit of £16.6m.

While this is an improvement on last year, growth was mostly driven by the success of its technology solutions arm, which provides robotics to many of the world’s biggest supermarkets. The Ocado Retail joint venture with Marks & Spencer, which makes up the bulk of the group’s sales, saw revenue growing just 5.0 per cent year on year against weak comparatives.

Commenting on the figures, Joe Dawson, Retail Analyst at GlobalData, a leading data and analytics company, stated that this is unlikely to have been the progress that Marks & Spencer bosses were hoping for, and leaves much to be desired as the retail division suffered a £2.5m loss for H1. The surprise decision to close the original Hatfield customer fulfilment centre (CFC) is indicative of a strategy shift at Ocado to focus on profitability amid weaker sales growth forecasts, but it will be an uphill battle for Ocado Retail to return to its previous peak in the pandemic.

“Compared to H1 2022, the number of active customers increased 10.6 per cent to 959,000 while the average selling price of products grew just 8.4 per cent, bringing the average basket value up 1.5 per cent to £121.50. Keeping price increases below the level of food inflation in the UK (18.4 per cent in May) will have been key to attracting and retaining customers as shoppers continue to seek out value for money and low prices. However, volumes are still constrained, with the average basket size down 6.3 per cent to 45 items, broadly reflecting the dynamics of the wider food & grocery market.

“Declining food inflation in the latter half of 2023 may provide some relief as consumers regain purchasing power, but recent increases in mortgage rates may have a negative impact on Ocado’s core consumer base’s disposable incomes, and it will be imperative to continue to offer good value and maintain lower prices to avoid the loss of regular customers. The 'Ocado Price Promise', which sees 10,000 of the online grocer’s products price matched with Tesco, will be key in driving further growth in sales and volume, as decreasing the premium typically associated with online grocery delivery will allow the convenience of the service to shine," Dawson said.