Ocado sees losses balloon due to Andover fire

Property, plant and equipment with a net book value of £96.9 million was destroyed or damaged to the extent that no amount is expected to be recoverable. 

Inventory held at cost of £5.5 million was destroyed by the fire.

The group also saw trunking and delivery costs rise significantly by £16.4m from £181.3m to £197.7m, an increase of 9% year-on-year.

This was due to increases in wage-related and vehicle costs as a result of greater order volumes and inflationary cost pressures.

The rise in cost was despite gaining efficiencies as deliveries per van per week rose by 1% to 196 (2018: 194) as customer density improved and with further enhancements to its routing system.

Warehouse (CFC) costs increased from £123.4 million to £143.4 million, an increase of 16.2% year-on-year. The rate of growth was primarily due to the increased number of customer orders combined with the costs of the full year of operation of the Erith CFC (a knock-on effect of the Andover fire).

While Ocado is fully insured, there is a time lag before it receives the full payout due.

Revenues rising

Revenues rose 10% from £1,598.8 in 2018 to £1,756.6 in 2019, reflecting growth both in the Group’s retail business and its solutions business.

Ocado Group CEO Tim Steiner said the underlying performance of Ocado Retail and the growth of Ocado Solutions were very encouraging.

Steiner said: “Our progress over the last twelve months, which includes signing our eighth and ninth Solutions clients, Coles in Australia and Aeon in Japan, and successfully maintaining strong growth post-Andover, has demonstrated many of Ocado Group’s most important characteristics: resilience, innovation, focus and execution. It is these qualities that will enable us to continue to develop the Ocado Smart Platform to meet the evolving needs of our partners at the cutting edge of online grocery retail. The first half of this year will see a new milestone for Ocado Group; the opening of the first customer fulfilment centres for our international partners.”

Ocado raised £600 million through a convertible bond issuance strengthening its funding position to £751 million.

The company also announced a joint venture with M&S.

Ocado will also soon open its first mini-CFC, which will be located in Bristol. The facility will have the capacity for 30,000 orders per week compared to 65,000+ orders per week in a standard-sized CFC. Despite its smaller size, Ocado expects the Bristol mini-CFC to achieve competitive rates of productivity close to a standard CFC.

Robotic arms are now assisting in the fulfilment of live customer orders in the Erith CFC. 

Ocado said: “We are continuing our development of vision systems, tactile gripper technology and machine-learning to enable robotic picking to fulfil a greater proportion of customer orders and are making encouraging progress. When this rolls out, we would expect material improvements to economics to be available to our partners.”

Ocado Solutions or Ocado Retail?

In response to Ocado’s results, Daniel Harvey, a manager at management and technology consultancy, BearingPoint, said: “Notwithstanding the implications of Ocado’s Andover fire, UK Retail growth hit 10.3% in 2019 delivered in part through greater operational efficiency. Therefore, the demand is there; stable and sustainable profitability needs to come for the company.   

"If they can position it effectively, Ocado are in a unique position to leverage their technology IP and sell this capability overseas, without investing a penny (or a cent) in physical infrastructure. The chosen track seems to be the offer of a complete end-to-end technological and physical solution – as illustrated in Sweden. But, could a platform model generate profitable income in the shorter-term to fuel growth, helping to combat the 2019 pre-tax loss of £214.5m?

"The question which has always lingered around Ocado remains; are they a technology business with distribution capability (‘Ocado Solutions’) or are they a distribution business who develop their own systems (‘Ocado Retail’)? The debate continues as they deliver progress on both fronts. 

"As the UK’s sustainability challenge heightens, Ocado could be uniquely placed to drive a grocery home delivery platform revolution; with Morrisons and M&S the key 2020 partners, who’s next?”