Ocado Retail, the joint venture with Marks & Spencer, saw revenue rise 3.4% in the first quarter to £583.7m. The increase reflects a 7.5% drop in the number of items per basket, offset by an 8.3% increase in average prices. This meant average basket value was flat at £124.
There was a 13.8% increase in active customers, to 951,000, reflecting new customer growth and more customers shopping with Ocado for longer.
The group said it was offering more M&S products and acknowledged the current trading environment was "challenging". Guidance remains unchanged, including mid-single digit revenue growth for the year.
Ocado shares rose 2.2% following the announcement.
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Our view
Ocado's Retail business - half owned by M&S - is doing what it can in difficult circumstances.
Ocado Retail is the business behind the delivery vans you'll see on roads nationwide. Grocery inflation is rife, and customers are tightening their belts. Ocado isn't a discount name, making it tough to compete in the current environment. The group's still able to attract new customers, but volumes are falling. That partly reflects the unwinding of big-basket shopping during the pandemic, but also speaks to changing product preferences during the cost-of-living crisis.
While things in this department remain challenging, it's important not to lose sight of the more important area of the business where the investment case is concerned.
Ocado's future growth is in fact focused away from Retail. It's all about Solutions. Ocado Solutions charges third party retailers to use Ocado's robotic systems. Hundreds of thousands of orders are processed each week, with the help of automated 'bots' scurrying around the trademarked grid systems.
There has been increasing demand for the kind of technology Ocado specialises in, allowing it to bring new partners on board. But the weakening economic outlook poses challenges. It puts pressure on existing and potential partners to cut unnecessary spend, and we're starting to see the online boom slow. However, running operations through Customer Fulfilment Centres (CFCs) brings a host of cost savings and efficiency benefits which could offer a competitive advantage for those who can afford it. Ocado's product is market leading. The question is one of demand.
Ocado is stumping up hundreds of millions to fund CFCs. This has led to significant fundraising from shareholders. While Ocado says it believes it won't need further external funding - we aren't convinced that's the case. Medium-term plans for free cash flow generation from existing CFCs seem ambitious to us, and we can't rule out Ocado burning through its available liquidity faster than planned.
We should be clear - Ocado has an amazing product. It's the only global provider of an end-to-end, online grocery platform. That's an enviable position. As the group builds scale and partnerships mature, profits and free cash should flow. We just aren't convinced this will happen in the projected timeframe, which could result in knocks to the valuation.
Ocado key facts
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