Food retail landscape is changing for good, says Britain’s Ocado

By James Davey

LONDON (Reuters) – British online grocer and technology group Ocado said the landscape for food retailing was changing for good as it reported a 69% jump in annual core earnings that were boosted by the COVID-19 pandemic generating huge demand for home delivery.

The increase reflected revenue growth of 35% at Ocado Retail, a joint venture between Ocado and Marks & Spencer, which offset a negative contribution from Ocado’s overseas technology arm due to additional costs associated with faster growth and accounting rules.

“The rapid acceleration of many pre-existing trends in business and society has been a feature of the COVID-19 crisis and the dramatic channel shift in grocery is a clear example of this,” said CEO Tim Steiner.

“The landscape for food retailing is changing, for good,” he said.

Steiner said that generally when shoppers try online grocery, they like it.

“Historically, we’ve always seen when customers have done this three to five times they tend to stick with it,” he told reporters.

Shares in Ocado have more than doubled over the last year, giving the group a stock market capitalisation of nearly 21 billion pounds ($29 billion) – nearly four times the value of Sainsbury’s, Britain’s No.2 supermarket group by sales.

That valuation has been driven by a combination of the pandemic highlighting the attractions of home delivery and demand for its state-of-the-art robot-operated warehouses from supermarket chains around the world.

In 2020 Ocado opened its first Customer Fulfilment Centres (CFC) for Casino in France and Sobeys in Canada.

It also has deals with groups including Kroger in the United States and Aeon in Japan.

Steiner sees huge opportunity. He said key markets for Ocado were worth 2.8 trillion pounds, of which its current partners currently represented 210 billion pounds, or 7.5%.

Ocado’s earnings before interest, tax, depreciation and amortisation (EBITDA) rose to 73.1 million pounds ($101 million) in the year to Nov. 29 2020 from 43.3 million in 2018-19.

Group revenue increased 32.7% to 2.33 billion pounds, with Ocado Retail contributing 2.19 billion pounds.

Revenue from the UK technology arm rose 13.6% to 654.3 million pounds, but was just 16.6 million in the international technology arm.

Accounting rules prevent Ocado from recognising revenue on partnership contracts until the first CFC is opened but it does incur all the costs.

Ocado said retail revenue growth in 2020-21 year would be highly dependent on the length of COVID-19 restrictions and the timing of planned additional capacity.

It forecast double-digit percentage revenue growth in the UK technology arm and revenue at the international technology arm to grow to about 50 million pounds.

Shares in Ocado were down 3.5% at 1043 GMT, reflecting a planned hike in capital expenditure to 700 million pounds and an expectation of increased international technology losses as investment is stepped up.

(Reporting by James Davey; editing by Sarah Young, Jason Neely and David Evans)