Ocado – sales rocket, profits tiny

Online grocery retailer Ocado has reported another quarter of strong growth but even so its share price is sliding due to profits that are relatively tiny.

The company has reported that its retail sales from its retail sales from direct business were £351.8 million for the 16 weeks to November, up 13% from the same quarter in 2014. Gross sales, which include its fulfilment operations for Morrisons.com grew 15% to £381.6 million.

Tim Steiner, Chief Executive of Ocado said, “We are pleased to report the thirteenth consecutive quarter of double-digit sales growth in what is a challenging and competitive grocery retail environment. Order growth remains strong with average orders per week now exceeding 200,000.”

Though the company’s business is growing significantly, City insiders still urge caution in praise for the online grocer. On last year’s revenues of £949 million it only managed profits of £7.2 million. Profits at around 7% do not make for a strong business in the view of many analysts and whether the strategy of rapid expansion will help the company generate better profits is not something everyone agrees with.

There is brutal competition in the supermarket grocery delivery market and this is driving profits down for all the players, small and large alike. Though Ocado’s express intention was to dominate the online grocery delivery market, it has not succeeded in the last 15 years of operation. Even on revenues of over one billion pounds this year, it will not match its rivals at Sainsbury or Tesco, both of which offer delivery programmes as well. Some suggest that it would need to increase pre tax profits by 800% in order to be a company worth investing in!

Despite the business having been around a long time, Ocado still has a long way to go before it is the darling of investors.