Analysts predict tougher times for Ocado

Analyst Clive Black at Shore Capital repeated his ‘sell’ rating on the stock and lowered annual profit forecasts from £10m to £2.5m. “With a very challenging consumer economic environment and Waitrose’s challenge to come, we believe there are few tailwinds to support Ocado’s momentum,” he said.

Ocado faces tough times ahead as upmarket grocer Waitrose prepares to launch its own service in London next month.

Ocado has a supply arrangement in place that will allow it to remain as a distributor of Waitrose goods for another ten years. In a bid to reduce its reliance on selling Waitrose products, Ocado has struck a deal with French retail giant Carrefour to trial a range of authentic French products.

The deal with Carrefour, the world’s second-biggest retailer behind Asda’s parent Wal-Mart, will see Ocado trial a range of French produce called ‘Reflets de France’ from next month.

But analysts are wary about the threat posed by Waitrose, part of the John Lewis partnership.

“Waitrose has put together a significant marketing programme with which to challenge Ocado within the M25,” said Mr Black.

“We see this as a growing and significant challenge to Ocado and whilst Waitrose needs to show that it can match the commendable service package of Ocado, if it does, then we can see a lot folk going straight to organ grinder rather than the monkey.”

Ocado is keen to grow sales outside of London and is enjoying strong growth in Yorkshire. Last week it said like-for-like sales in Leeds rose by 38 per cent.

In the 24 weeks to May 5, Ocado produced a modest maiden first half profit of £200,000 against a loss of £6.7m for the same period last year.

Last night Ocado’s shares closed down 17p at 170p.

The group has seen its shares go on a rollercoaster ride since floating at 180p last July.

After plunging to 120.9p as some analysts questioned its model of selling groceries from a central warehouse, they surged to 290p after it broke into pre-tax profit in the fourth quarter of last year.

Most recently, the stock has come back under pressure after second-quarter sales growth was held back by capacity constraints and as Waitrose prepares to launch in central London.

Ocado said that sales growth slowed during the first half and more orders were delivered late as it struggled to keep up with demand.

It admitted that the number of orders delivered on time decreased to 92.7 per cent from 94.9 per cent, which it blamed on capacity issues at its main distribution centre in Hatfield. Efficiency of order picking at the centre also declined.

But it said it would spend £80m in 2011 and 2012 increasing the capacity at the site and pledged its performance and efficiency would improve as the investment paid off.

Sales increased 20.8 per cent to £296.7m, down from 24.7 per cent in the first 12 weeks of the period.

Ocado expanded the number of its Ocado branded products by 100 to 350 in the period.

It faces stiff competition from other supermarkets’ online offers, which will be stepped up when Bradford-based Morrisons enters the market.

Ocado said it continued to see strong demand in recent weeks, although it is still dogged by capacity issues. It said it is making progress in increasing its capacity and expects further profitable revenues growth for the rest of the year. It spent £10.4m on upgrading its systems in the half-year.

Mr Black, at Shore Capital, said: “Since flotation we have noted three batches of market downgrades to Ocado stock. Expectations were clearly too optimistic at the start.

“Three downgrades for a stock on stratospheric valuation multiples is neither acceptable nor sustainable, something has to give and it should be the stock price.”

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