Online grocery retailer Ocado has raised eyebrows by issuing a stark profit warning. The company had expected to make significant gains this year but instead the trading statement suggests they will do well to break even. Ocado blames the poor results on staffing costs incurred at its distribution commercial property in order to fulfil orders. The markets reacted badly to the news with the company’s share price falling by 16%, amid fears that the difficulties being experienced by Ocado may not be easily resolved.
Ocado was founded ten years ago by a trio of former Goldman Sachs merchant bankers and operates from a hi-tech centralised distribution centre in Hatfield Hertfordshire. It supplies a range of own brand and supermarket groceries with the most popular being Waitrose products. Ocado prides itself on this upmarket image and its customer service pledge. Among its promises is that customers can select their own delivery time and that each of its distinctive custom built vans can replace up to forty daily car journeys.
Ironically it is the on-going attempts to fulfil this service that the company says is at the root of its current problems. The company’s trading statement cites “capacity constraints” for a slowing in growth from 17% to 10%. Ocado is currently struggling to install a new 5km conveyor belt system as part of an £85 million investment at Hatfield.
This has resulted in a failure to meet its target of 140,000 deliveries per week. In order to reverse the trend, Ocado has spent a further £3 million on extra staff and shipping costs to complete customer orders on time. The statement insists that this has been partially successful and that over 90% of orders were delivered correctly and to schedule over recent weeks. However chief executive Tim Steiner concedes that Ocado’s problems have not been entirely solved. “There is more work to be done and we are focused on delivering capacity and sales growth in the first half of 2012;” he promises.
Some analysts are not convinced that this will be easy with one telling the Guardian he did not expect Ocado to make a pre-tax profit for another two years. “Our view is that customers have finally got cheesed off by the declining service standards here. Clearly more orders are having to be picked by hand than was initially planned and this technology breakdown has persisted much longer than feared;” he said.
Others point to competition from Waitrose which has launched its own online service as a factor in Ocado’s disappointing figures and suggest that concentrating distribution on a single site may be a weakness. “Maybe it’s just the case that Ocado has a flawed business model with an over-invested centre and extravagant distribution costs;” another said. Ocado will go some way to addressing this when a second distribution commercial property opens in Warwickshire next year. In the meantime the company will be hoping that its difficulties over Christmas don’t drive customers away in the New Year.
