Ocado missed its chance. It is doomed to be niche

The pandemic was a golden opportunity to transform itself from a plucky retail upstart into a genuine challenger to Tesco

The new year is always full of hope, yet how about this from the fresh-faced chief executive of Ocado’s tie-up with Marks & Spencer: “We remain confident in our ability to reset the bar in online grocery retailing,” proclaimed Hannah Gibson, in a video posted on social media.

Unfortunately for her, if current form is anything to go by then that ambition remains a long way from being fulfilled. That has always been Ocado’s problem: big on promise, but short on delivery, which is even more unfortunate given what it does.

After a short-lived lockdown-inspired boom, new figures show that shoppers are already starting to go cold on Ocado, despite its much-trumpeted joint venture with M&S.

It is not that people aren’t shopping with Britain’s online food trailblazer, or that they don’t want good quality, M&S food delivered to their door. In fact, it is actually winning new customers – orders were up nearly 2pc in the final quarter of last year.

But that’s pretty much where the good news ends. Increasingly it looks as if the company has missed the boat if it wants to be anything more than just a niche outfit watching from the sidelines of a fiercely competitive grocery field.

The pandemic was a golden opportunity for Ocado to transform itself from a plucky retail upstart into a genuine challenger to Tesco or Sainsbury’s.

The smart move would have been to markedly broaden its offering to appeal to a much greater proportion of the population. Instead, the retailer chose to continue flogging premium food and drink to the middle classes, at the same time as being distracted by a wayward bet on selling its software to overseas rivals.

For all the excitement about Ocado since it was started, it simply remains far too small to really trouble the incumbents. The company says “active customers” grew to 940,000 – a 12.9pc increase on the same period last year. Yet, it is currently carrying out just 381,000 deliveries a week – equivalent to 0.5pc of the population. Given that Ocado is more than two decades old, this is an underwhelming statistic to say the least. Likewise, its market share of just 1.7pc.

More worryingly for Gibson, who took over in September, although Ocado is winning new customers, it is not enough to prevent annual turnover falling for the first ever time to £3.3bn, a decline of 4pc. Shoppers purchased fewer items, bought less frequently, and have been trading down to cheaper labels in the face of a vicious cost of living crunch that has propelled food prices up by a record 16pc.

Now, with the middle classes being squeezed, Aldi and Lidl look poised to steal an ever bigger march on the rest of the pack, having been in the ascendancy for many years.

None of this brings Ocado any closer to generating a profit. With lower basket sizes expected to persist in the first half of the financial year, management has pencilled in “mid-single digit” revenue growth and “close to break-even” profitability, which presumably means a small loss.

This adds to existing tension at the heart of the joint venture with M&S, raising the question of to what extent it honours an outstanding one-off payment to Ocado for its 50pc share.

The payout is contingent on the tie-up reaching a certain level of profitability this year, and though the precise figure has not been disclosed, M&S recently slashed the “fair value” of the remaining amount due from £172m to £60.5m, suggesting it is anticipating a discount.

An additional setback is that, having struggled to keep up with demand during the pandemic, it is now suffering from excess capacity. After the opening of four new warehouses in quick succession, Ocado has been forced to put on hold plans to build a further two in the North West and South East. The pause has reduced sales capacity from the £4.5bn previously planned to £3.9bn in the medium term.

Much of the steam has come out of the e-commerce boom. Remember all the excitement about a supposed permanent change in shopping habits, in which the world chose to stop visiting actual shops out of choice, rather than simply being prevented from doing so by over-zealous government-employed scientists?

It turns out the soothsayers were wrong – most of us still like a trip to the local supermarket. The large majority seem unwilling to pay £7 for the privilege of having the weekly shop delivered to the front door, even if it comes in a climate-saving electric van and the nice Ocado driver wheels your goods into the kitchen with a cheery smile.

At best, investors remain unconvinced by Ocado’s long-term post-covid prospects. Shares tumbled 9pc yesterday to 733p, following on from a year in which they have halved. The company is a considerable way off its highs of £28 seen in February 2021.

Ocado’s “jam tomorrow” story was much easier to sell when interest rates were at all-time lows but having ridden a wave of cheap borrowing, investors are now demanding that a generation of tech companies demonstrate they can actually make cash.

With the cheap money spigot firmly turned off, Ocado’s chance to transform itself from plucky upstart into a genuine challenger may have already been and gone.

‘The smart move would have been to broaden its offering for greater appeal’