Hello, and Welcome to the Ocado Retail Q1 2023 Trading Update Analyst Call. Please note this call is being recorded. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. I will now hand you over to Hannah Gibson, CEO Ocado Retail, to begin today's conference. Please go ahead.
Good morning, everyone. This is Hannah Gibson, CEO of Ocado Retail. I'm joined this morning by the chairman of Ocado Retail and CEO of Ocado Group, Tim Steiner. The key message from today's first quarter trading statement is that we are on track to restore sales momentum. The performance of the business is in line with the expectations we set out with our Q4 trading statement on the 17th of January, and there's no change to guidance, and more on that shortly. Since the beginning of the year, we have been perfecting each of the elements that make Ocado so special. For our customers, this means delivering the best service in the market right to the kitchen table with on-time delivery and order accuracy back to pre-pandemic standards and close to our best ever levels.
It means unbeatable choice across our branded and own brand ranges, where we're championing also small and unique suppliers and making sure our customers can experience more of the magic of M&S. It means investing in value, and you'll have seen the launch of the Ocado Price Promise, delivering the Ocado experience at Tesco prices. These are early days, our strategy is starting to bear fruit. We've continued to attract more active customers, up 13.8% year-on-year to 951,000, this has led to a 3.6% increase in the number of customer orders on ocado.com.
As expected, however, our headline sales number is still impacted by COVID unwind, accelerated by the continued cost of living crisis in the U.K., with consumers responding to high food price inflation and lower real incomes by managing their spend on food more carefully than before. As a result of that, the average selling price on ocado.com was up 8.3%, significantly lower by the way than the market overall. With this, a decline in the number of items per basket of 7.5% year-over-year to 45 items per basket. The value of the average basket was flat at GBP 124. This compares to a 1.3% decline in the value of the average basket in Q4, the improvement mainly driven by a slightly higher average selling price.
In the second half of the year, we'll continue to improve our proposition, grow our customer base, and we will no longer cap lapsed COVID shopping behaviors. As a result, we expect volumes to grow in the second half. Hence, there is no change to the guidance we gave in February with the Ocado Group FY '22 results. Allow me just to remind you what we said then. In the current year, we expect mid-single digit revenue growth with an improving trajectory during the year. EBITDA, meanwhile, is likely to be negative in the first half and positive in the second half as a return to volume growth supports improved capacity utilization and reduced costs relative to sales. In the medium term, we remain confident in light of the strong customer acquisition and continued improvements to underlying productivity that sales and EBITDA margin will cover strongly.
Taken together, growing customer numbers, orders, and increased utilization of available capacity will underpin a recovery to high mid-single digit EBITDA margins. For these reasons, we look to the future with confidence as we return to sales growth and profitability. Let's go to questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will pause for a brief moment. Our first question today comes from William Woods of Bernstein. Please go ahead.
Hi, good morning. Two questions if I may. The first one is on demand and how it trended throughout the quarter. You obviously had a pretty strong Christmas, but have you seen any change in consumer behavior or demand tail off during the quarter, particularly any color that you could give in terms of orders or average basket values? The second one is around the cost base. You obviously spoke about 3 different hits to EBITDA last year, fuel, electricity, and dry ice. Can you just give us an update of how these costs are trending or how you're mitigating the impact of some of these costs in Q1 and Q2? Thank you.
Thank you, William. On your first question in terms of demand and how that's the shape of that over the quarter, exactly the same, but obviously, you know, we talked today about being up overall 3.4% versus the same quarter last year. As you know, within Q1, that includes our Christmas. Actually coming into January, we've seen pretty steady loyalty and frequency from our customers since the start of January. Inevitably, the start of January, people are very cost conscious. We see that kind of pattern actually, frankly, in many Januarys throughout the year. Actually coming out of the quarter, we saw improving a good trajectory coming out of that quarter as well.
While Christmas was strong, actually we think we're kind of keeping the momentum going throughout the quarter and beyond as well. In terms of kind of from a basket size perspective, as I've stated, you know, we're seeing the average cash basket remains pretty flat year-on-year, and again, that's been relatively consistent through the quarter. You know, obviously inflation is still there, we'll obviously keeping mindful of what that will do going forward, but actually no big shifts across the quarter from that perspective. In terms of cost base, you highlighted one item, but actually across the course of, you know, this year, there are a number of areas from a cost base perspective that we're focused on.
You know, firstly in terms of fulfillment, obviously I talked earlier about improving our capacity utilization. That will help in its own right. On top of that, from a productivity perspective, we are seeing our CFCs, you know, continually operate at, you know, month-on-month records in terms of the UPH and the productivity that they're seeing. From a marketing perspective, we're being more targeted in our marketing strategy, and we expect that to improve our potential sales this year versus last year. As you say, there's also kind of utilities, fuel, electricity, dry ice. We've seen some of those prices improve over the course of the year.
you know, we've increased our amount of hedge going into next year, and obviously, we are, yeah, we are looking at how we balance that versus the other efficiency savings we're going after too.
Will, I would just add to that the first part of the year, Q1 and the first part of Q2, are still the period in which the kind of the government caps were imposed and people were hedged out. Largely we're paying that rate, which is high, not as high as it reached before they did it, but not as low as the market subsequently got to. Beyond that, we held off on our hedging activity and have been hedging in this much more friendlier market, which will leave the electricity cost for the year, I think is down on last year, but with an exit rate significantly lower than the average.
Understood. Thank you.
Thank you.
Thank you. We're now moving on to our next question from Andrew Gwynn of BNP Paribas. Please go ahead.
Yeah, good morning, team. Hopefully you can hear me. You sound like you've got some building work going on in the background. Just firstly, capacity utilization. Just help us understand where you are, and actually also when Luton comes on stream. I think that's a little bit later in the year. Second, I know you introduced it during or the same day as the full year results. We didn't really talk about it then, but why the Tesco price match now? Thank you very much.
Thank you, Andrew. Apologies everyone for the building works. Yeah, there is quite a lot of banging going on outside. So in terms of your first question, Andrew, on capacity utilization, so yeah, we've talked before about being two-thirds of our overall capacity. We're not gonna give specific numbers on what that looks like, but as in terms of the trajectory going forward through the year. Actually, as you can imagine, we will be improving that overall capacity as we go. We've got a healthy growth in terms of new customer numbers. We've got healthy growth in terms of mature active base going through. We'll expect that to continue as we go. We have, exactly as you call out, got Luton coming online later in the year. It's in Q4, broadly speaking.
Actually, as I said earlier on, we are seeing improved levels of productivity in each of our sites that are going live, that are the new OSP sites. We will see the efficiency improvements from that.[The second question,] in terms of Tesco price match, why now? It's a great question. I'd say that actually, you know, different retail, right? Different times call for different focuses and, you know, it's fair to say that right now value is the thing that it's at the top of consumers' minds. Obviously with inflation, going on as it stands, we've got many customers who are loyal Ocado customers, but it becomes quite hard to track whether or not you're getting a great deal, whether or not you're getting great value.
We wanna be making sure that our customers are getting fantastic choice, great service, and being able to, you know, see that they're getting great value for that as well. We only launched it a few weeks ago. We've already seen that our NPS scores on value have improved over that short course of time already. I'm seeing it in the customer feedback unprompted, people saying they're happy that they can now get the Ocado Price Promise. Hopefully that will play out in terms of improved benefits as we go through the year as well.
Okay. All very clear. Thank you very much.
Thanks, Andrew.
Thank you. We're moving on to Luke Holbrook of Morgan Stanley. Please go ahead.
Good morning. Just a couple if I may. First is just on, you made a few headcount cuts at your head office a couple of months ago or a few months ago now. Just interested to hear how you're thinking about the cost base in that part of this year. Just secondly, any views that you have in kind of the disinflation environment as we go through the second half of this year. Do you see it as a bit of a headwind to your revenue growth or otherwise, do you see consumer volumes improving and therefore more of a positive? Thank you.
Thank you, Luke. In terms of the cost base, I think I outlined before in my response to William, there's multiple parts of cost base. There's fulfillment cost, there's marketing, there's utilities, and we're focused on many of those in terms of improving them. In terms of other efficiencies that we've been making, we've been looking at, you know, things like waste, post delivery adjustments and are looking at improving those as well. Absolutely, you're right, you know, that we have been looking at our central cost too. We did a review in the autumn, in terms of our head office, and we made some changes then. We're not planning any further changes to our head office in Hatfield, at any point soon.
We think we've got the right size for the business to take us forward. In terms of your second question, in terms of inflationary environments, as I said, at the moment, we're seeing cash basket remain static. That said, in terms of what we're seeing with inflation, we are seeing that there are continued cost prices coming through, cost price increases coming through, which we'll be working with our supplier base on. We're also seeing in some areas actually commodity prices are starting to come down. Overall we're still seeing an increase, but you know, you start to think, you look at the external, you know, advice on this and we expect over the course of this year to, for inflation to be coming down.
In terms of how consumers will respond to this, you know, obviously we'll keep a close eye on that as we go forward. While there will be headwinds from that, I also think there's lots of opportunity for us going ahead as well, and there's more we can do to be improving availability. There's more we can be doing to making sure we've got the right choice in front of our customers too. Hopefully those two things will net out, and we'll continue to see a stable trend.
Thank you.
Thank you. As a brief reminder, that is star one for your questions today. We now move on to Simon Bowler of Numis. Please go ahead.
Good morning. Pardon me. A couple for myself, please. First one. Dear me, sorry. First one, just being on your ranging, there's a kind of a few bits that you kind of mentioned within there. Can you give us any sense in terms of how you're thinking about or what you're seeing in terms of your overall kind of breadth of ranges as the much of a change that you're planning to put through or putting through with regard to your SKU count? Secondly, just on customer numbers up kind of 11K or 1% in the quarter. Can you just talk about some of the dynamics that are beneath that regarding, I guess, kind of churn and customer acquisition trends?
Absolutely, Simon. Yeah, thank you for your question. Firstly on ranging, it's a great question. Overall, I'm sure many of you are familiar with this, but, you know, we've got a SKU count of over 50,000 products. Actually, I think of this as a real point of differentiation, but you'll hear me talk quite a lot about choice rather than range because, I think they are different things. It's all about making sure we've got the best choice in the market, making sure that we're meeting every single different need state, and that could be everything from making sure that we are broadening our Ocado in-brand range to make sure that we've got all those items you need to do a big basket shop for the week for the family. We've obviously got M&S.
We've been improving the number of products we've got, that we're launching with them at the moment. We saw, you know, that we did increase sales of, you know, higher welfare chicken, for example, which is kind of interesting dynamic versus the people focusing on own brands. Also in terms of smaller suppliers, wanna make sure that we're getting back to getting, you know, those early trends back into Ocado first. We'll see things that at the moment, like fermented products, for example, are a good example of things that customers are going after. We're trying to really make sure that we're getting that great choice of need states. We do have, you know, more than double the SKU count of an average supermarket.
It's how we make sure we make the most of that. We are also focused, though, on the efficiency of those products as well, though. Making sure that actually we've got products that have got a great rate of sale and that we're managing that overall cost, and getting the best return on that SKU count as well. That is a bit on range. In terms of customer numbers, thank you for your question on this. We're at 951,000. That is still up 13.8% year-on-year. You do see kind of Q4 to Q1, it's not necessarily just straightforward, just extrapolate from one to the second. What I will say is actually a little bit more about the underlying trends here.
Actually our mature customer base, i.e. those customers who've got beyond the fifth shop, have actually been improving steadily over the last few months. It's actually up 3%, on the quarter. You extrapolate that out to an annual number, obviously that's kind of a healthy number to be looking at. The second thing just to note is that actually, you know, we've been more focused on our marketing strategy, you know, over the last few months as well. So we're really making sure we're more targeted to bring in better quality of customers and getting more of those to fifth shop. We've certainly seen some improvements in that over the last few months as well. I hope that helps.
Yeah. Could you possibly expand on what you're changing from a marketing perspective? I think on the shift between kind of marketing and vouchering is quite different to how it was pre-COVID. Are you reversing some of that, or is it a different focus of your marketing spend?
Let me... Just there's probably three things just to call out there, Simon. The first is when we are kind of going out looking for customers, as it were, we're being more targeted in the customers that we're going after. So both in terms of channel mix, but also the customers that we're targeting within that channel mix, we are taking the opportunity to kind of up our game in terms of how we can be more targeted there. The second thing to talk about is, like, as you're saying, and I think as we've alluded to in previous previous calls, we have increased the amount of vouchering versus, you know, a year to years ago, precisely to try and get customers over that initial barrier, right? To get them to try Ocado, to understand it better.
Thirdly, what we're doing is making sure that we are, we've improved the nursery journey. That experience that customers get from that first shop through to that fifth shop's improved. We've seen a significant improvement in that over the last few months in terms of customers going to fifth shop.
Great. Thank you.
Thank you. As there are no further questions at this time, I would like to hand the call back over to you, Hannah Gibson, for any additional or closing remarks.
Okay. Thank you, everyone, and that concludes our call. We'll give a next update with the on sales with the Ocado Group half year results, and that will be on the eighteenth of July. Thank you for your questions and see you all then.
Thank you. That concludes today's call. Thank you for joining, everyone, and enjoy the rest of your day.