Morrisons helps Ocado to first-ever profit

ONLINE grocer Ocado is set to announce its first ever annual profit after a distribution deal with Morrisons helped it swing into the black in the first half.

Dalton Philips, Chief Executive of Morrisons

Ocado ​has not made an annual pre-tax profit since it was founded in 2000, but it has benefited from a £200m deal signed with Morrisons last year to launch the Bradford-based grocer’s late foray into online sales.

Ocado made an underlying pre-tax profit of £7.5m in the 24 weeks to May 18, compared with a £1m loss last year.

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Analyst Clive Black at Shore Capital said: “Morrisons’ business is said to be ‘particularly encouraging’, creating a basis for future agreement apparently.”

Anecdotal evidence suggests that Morrisons, which is losing customers to German discounters Aldi and Lidl, has seen a strong start to its online sales push.

​Morrisons started delivering online grocery orders in East Yorkshire for the first time last month as it moved further into its Northern heartlands.

It already delivers to West and South Yorkshire, London, Birmingham and Warwickshire.

​Its link up with Ocado’s sophisticated delivery systems has enabled it to offer extras such as a chilled drink service, offering cold beer, wine and soft drinks for doorstep delivery.

​So far Morrisons has seen a 96 per cent success rate for delivering on time, ​thanks to Ocado’s expertise.

Morrisons is having to play catch-up with its three main rivals which have offered customers an online service for many years.

The group claims that while it is late to the party, its model is profitable and it can win back customers who shop online with rivals.

It expects its online service with Ocado ​to cover 50 per cent of the country by the beginning of 2015.

​The​ online grocery market is growing at 15 per ​​cent a year, far outpacing the broader market​.

It​ accounts for a mere five per ​cent of total grocery sales​ at the moment and ​​retail researchers IGD ​predict it will more than double​ in size over the next five years.

Despite the rapid growth, Ocado has struggled to make a profit due to the costs and ​difficulty of delivering perishable goods to customers’ doors​.

Rivals Tesco, Asda and Sainsbury’s claim their online services are profitable, but don’t break out the figures.

​Jonathan Jackson, head of equities at​ Killik & Co​, said:​ “Ocado has reported good first-half results, which highlight an increase in market share in online grocery sales and a continued improvement in operating metrics.

​“​Ocado expanded its delivery capacity with the opening of an additional spoke in Ruislip during the period, with further spokes in Enfield and Sheffield due to open in ​the second half.

“The delivery capacity for all of these spokes will be shared with Morrisons, resulting in improved cost and capital efficiencies during the ramp-up phase.

Ocado ​delivers​ products supplied by upmarket grocer Waitrose as well as its own expanding range of own brand groceries​ .

​Ocado’s gross sales rose 15.6 per​ ​cent to ​£442.4m in the 24 weeks to May 18, having been up 18 per​ ​cent in the first quarter.​

​The group’s chief ​e​xecutive Tim Steiner​ attributed the slowdown to “subdued and cautious consumer spending”. ​​

​A​nalysts are ​predicting an annual pre-tax profit of about ​£​16​m for its 2013-14 financial year.

Ocado’s share price ​​has fallen over the last six months, ​​​but ​it is still up 24 per​ ​cent over the last year on the back of ​ ​its​ ​deal with Morrisons ​​and hopes that it an carry out similar deals overseas.

Market researchers IGD said online will be the fastest growing part of the market over the next five years, more than doubling in value to £17bn, boosted by a surge in home delivery and click and collect services.