Ocado (LON:OCDO) is the latest grocer to highlight the emergence of pressure in wholesale food pricing as a result of the weakness of the pound. The group’s comments about these "market pricing dynamics" are categorical and carefully framed, and rightly underline that further developments hinge on what happens next with sterling. More importantly, any impact in the quarter to the end of February appears to have been contained, given that Ocado's gross retail sales rose at the same 13.1% rate as the prior quarter. However, the group's cautionary tone on pricing signals that it expects to be just as prone to deleterious inflationary pressure as larger and more conventional grocery rivals.
Whilst Ocado’s business model, in theory, enables it to remain profitable at lower operating margins than would be sustainable for established large supermarket chains, that model is thrown into question if subjected to potential top-line erosion from negative currency effects.
Looming inflation heightens other risks to Ocado’s model in the current retail operating environment, making the protracted quest for an international technology licensing deal (now two years longer than was initially stated) all the more urgent. Fortunately, the group is “as confident as ever” that it will ink a new deal. We note though, that it no longer states a clear time frame over which it expects to win another contract for Ocado Smart Platform. It’s no secret that the lack of such a deal is the biggest weight on Ocado stock, which has drifted lower for three consecutive years.
Again, should the wait for an international deal continue for much longer, another often repeated assurance —reiterated on Tuesday—that it expects to outpace both online and overall grocery market growth, will also begin to ring hollow, as bigger, more aggressive e-commerce rivals, with deeper financial resources—particularly, though not solely Amazon (NASDAQ:AMZN) Fresh—begin to make inroads in grocery retail.
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