Hello, and welcome to the Ocado Investor Analyst Update. I'll shortly be handing you over to Duncan Tatton Brown and David Shriver, who will take you through today's presentation, and there'll be an opportunity for Q&A later in the call. For now, over to Duncan and David at Ocado. Please begin.
Good morning, everyone. This is David Shriver, Communications Director at Ocado Group. Welcome to the third-q uarter trading update for Ocado Retail, which, as you all know, is a 50/50 joint venture between Ocado Group and Marks & Spencer. Our Chief Financial Officer, Duncan Tatton Brown, will give you a brief summary of Ocado Retail's performance in Q3, as well as an update on the switch to M&S on the 1st of September, and then we'll go to questions. Duncan, over to you.
Thank you, David. Ocado Retail has had another quarter of growth. Sales in Q3 grew 52%, representing a further acceleration compared to the 44% growth we recorded in Q2. A number of factors have driven this. First, orders per week have returned to positive growth thanks to a combination of strong demand, a phased reopening of the website to new customers, and some normalizing of shopping patterns. Second, average order size remains above pre-crisis levels at GBP 141, although it continues to normalize from its highest COVID-related peaks. Third, the year-on-year comparables highlight the strong demand we're seeing. Online shopping is increasingly attractive to customers, and we continue to see the smoothing of demand over the week, enabling us to serve the highest level of demand. In this quarter, we compare against seasonally softer growth in Q3 2019, a quarter when many customers have traditionally taken holidays away from home.
I'm delighted to report that customers have responded very positively to the switchover to M&S products on the 1st of September. M&S products have increased the average basket by around five items and are driving strong forward demand, including our biggest ever forward order day on the day of launch. Over 98% of customers are already shopping M&S. The initial range of 4,400 food products replaces around 4,000 Waitrose products, providing high-quality alternatives at the same or better prices. M&S favorites and hundreds of completely new products, which reflect trends that Ocado.com customers are most excited about, such as M&S Plant Kitchen, M&S Organic, and the remarkable Made Without Range. We expect to add around 800 more M&S products to the range in the coming months, including the launch of M&S's Christmas ranges, entertained by Ocado, and further new product developments.
In addition, Ocado.com now features around 700 M&S home and lifestyle product lines, further enriching the hypermarket offer for customers with M&S hero categories such as toiletries, baby, kitchen, dining, and household. As customers turn in increasing numbers to buy their groceries online, we're confident that Ocado can offer the best value, the widest range, and the highest levels of service to an increasing number of customers. In this way, Ocado Retail is well positioned to remain the U.K.'s fastest-growing grocery retailer. A quick word on our immediacy business, Ocado Zoom. The performance of Zoom remains both positive and encouraging, and we're currently planning the rollout of additional micro fulfillment centers.
Zoom is part of the flexible Ocado Smart Platform ecosystem, which allows Ocado Retail, as well as, in time, our other international partners, the ability to offer customers the best value and service from the big basket shop to the top-up shop within an hour of ordering. As a result of the strong performance we've seen, we're modifying our financial guidance for the year. While uncertainties remain, such as the impact of social distancing restrictions in the U.K., the strong trading performance of Ocado Retail in the first three quarters of the year, combined with the impact of operational leverage in the retail business, suggests a full-year EBITDA result for Ocado Group of at least GBP 40 million versus current consensus of GBP 26 million, which you can see in the investor section of the group website. With that, I'm now happy to take your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, could you please press star and then two on your phone keypad now, and after I announce you, just ask that question. There will be a brief pause while the questions are being registered. Our first question is over the line of Thomas Davies at Berenberg. Please go ahead. Your line is now open.
Morning, Duncan. I guess just one question from me. Just on your commentary then on Ocado Zoom, given it's likely to take time to build that network of micro fulfillment centers, would you consider leveraging some of the M&S store space as a way to capture market share for this in the near term?
Good morning, Tom. Yeah, I mean, I think everybody's aware that the platform that we operate enables a variety of ways of serving the customer, obviously with our standard-sized CFCs, mini CFCs, Bristol CFCs due to open in the first quarter of next year, and micro CFCs like the one we have in West London. We also provide in-store fulfillment technologies used by Morrisons and, I expect, an increasing number of our customers. Yes, there is always the possibility that with M&S we'd look to do that, and you can imagine some benefits to Ocado Retail of that if that was in areas that are currently not served by Ocado Retail. There's nothing specific to say today, but yes, it remains a possibility.
I think time for the next question.
We now go to the line of Marcus Diebel at JP Morgan. Please go ahead. Your line is now open.
Hi, yes. Question from my side. Duncan, could you talk about any change in customer behavior? I'm just looking, obviously, very impressive growth now in the third quarter. What I would be interested in is the recent cohorts that you acquired, yeah? So the new customers that came to the platform recently, it looks like they're very sticky, not changing. Is that fair? The second question is on Zoom and competition here. Clearly, we see a lot of food delivery players going into the space. Could you talk maybe a little bit about the benefits that you were seeing in terms of cost that you might have over them, yeah, and how you see the development of, obviously, delivery partnering with Waitrose or potentially also Just Eat going into some delivery options?
Just how you see this impacting Zoom, I mean, is basically in terms of your rollout, everything on track? That would also be interesting. Thank you.
Yeah, sure, Marcus. Good morning. In terms of customer behavior, customer behavior is starting to normalize, as we talked about, in terms of basket size. The sort of long-term dynamics of the Ocado customer remain true, which is they are traditionally very sticky once they become a regular shopper, which typically we see if they've shopped us five times. Those sort of long-term trends are there. The team in Ocado Retail are working hard to identify ways of finding the best customers to add to the growing number of customers we can serve. Clearly, we are still capacity constrained, but I think we're having some success at acquiring better customers. From Zoom's perspective, yes, we think the Zoom proposition is a better proposition for both the retailer and the customer. The customer gets access to over 10,000 products delivered within an hour.
It is a very different proposition to most of the other food delivery propositions, which are much more limited, substantially more limited in range. This is almost like a small supermarket range available within an hour at pricing which is very close to supermarket pricing because our Zoom pricing is very close to Ocado.com pricing. We enable that by using the automation and the capabilities of our larger fulfillment centers. Receiving goods in the large CFCs and enabling decanting them, putting them into stock totes, using the efficient automation in those large CFCs enables us to take cost out versus a sort of traditional convenience offer.
Yes, we think this works for the customer, and it works for the retailer, and we'd expect to see a lot more of them in the U.K. for Ocado Retail, and ultimately, I think, from our platform customers globally.
Perfect. Maybe just as a follow-up to the first question, it really is the case that maybe those customers that you acquired recently maybe came for different reasons than customers in the past when they signed during the pandemic, but it seems those have been properly converted, and the churn of those customers is very, very low, right? Is that a fair assumption?
I think, Marcus, what is important to note is we're not out there trying to add a lot of customers at the moment. There is so much demand for online grocery. We're not out seeking lots of customers, spending a lot of money on marketing to acquire customers because there is a lot of pent-up demand. If there's a lot of demand, then customers generally are quite loyal. We think it's a good position. Importantly, we're adding 40% capacity next year, and we think the channel shift, which has substantially accelerated, will give great opportunities for Ocado Retail to grow over the next few years once we can add a lot more capacity. I have no doubt we're looking at adding more capacity beyond the three CFCs that we're on track to open next year.
Yeah, perfect. Thank you very much.
Our next question is over the line of Andrew Glynn at Exane. Please go ahead. Your line is now open.
Hi. Good morning, Duncan. First off, best of luck in your new endeavors. I'm sure you'll be hopefully as successful as you've been at Ocado. Best of luck, and thanks for your help over the years. Just getting to my questions. I've got lots, actually, but I'll try and limit them. The first is just on a report in the Grocer, which suggested that Ocado Retail is essentially out there beating up suppliers, demanding pretty significant price cuts. I think the figure mentioned was 7.5%. I'm just wondering if you could comment on that. It does seem quite aggressive. The second is just on capacity. You've mentioned that 40% figure, but I guess that's probably towards the tail end of 2021. Obviously, significant demand at the moment, but the group's growth is largely constrained by capacity.
Maybe just a little bit of help for a short term to model the coming quarters as how that capacity might phase. The final question— I've got another one, but I'll leave it on that. Just on the M&S products, I mean, five extra M&S products sounds pretty good, but I think the basket is down sequentially versus Q2. I'm just wondering what the missing part is in that story. Thank you.
Good morning, Andrew. You disguised three really nice, challenging questions with some nice words at the outset. Nicely done, Andrew. I will miss your questioning as well. On your three points, yes, I mean, I think there's a little bit of noise around the sort of the annual negotiation debate with suppliers this year. I wouldn't read too much into that. I think there are opportunities for Ocado Retail to secure better terms from its suppliers over time. I think quite rightly so. The business is growing. We're the fastest-growing grocery in the U.K. There's great opportunities for our suppliers given our arrangements with M&S. The opportunity for a supplier with Ocado and M&S is much greater than it was before. I think it's absolutely right that we'll look to improve terms, but we work well with suppliers, both big and small.
I don't think you should expect this to be anything out of the ordinary, just a little bit of noise that comes at this time of year when there's a bit of a negotiation. On capacity, you're absolutely right. The 40% is the aggregate extra capacity from the three facilities we're due to open next year. Bristol, which is the smallest of those, will open in the first quarter. The next two will open sort of mid-year, stroke, end of year. We won't be adding 40% of capacity in the first quarter, but if you think about it, Bristol is about 30,000 orders per week. We'd expect to ramp that relatively quickly at a current level of 350,000 orders per week of demand. You're getting close to adding about 10% capacity through the first quarter.
Capacity is coming on, as it were, on a ramped basis across the year. In terms of a basket size, one of the things, Andrew, in your commentary there, we talked about products, so sort of items rather than numbers of products. We are selling more M&S products than we were selling of our previous supply partner in terms of different product types. Of course, over time, we are not seeing the same multiple items of the same product. Rather than buying two blocks of cheese, people are down to one block of cheese. Rather than buying four pints of milk, they are down to two pints of milk, whatever it might be. The choice of the M&S product range has gone up from our previous supply partner.
Okay. I think I'm a bit confused on the last point, but I'll follow up with David maybe. Thank you again, and yeah, best of luck again. Thanks to you, Duncan.
All right. Thanks, Andrew.
Our next question is from the line of Nick Coulter at Citi. Please go ahead. Your line is now open.
Hi. Good morning, Duncan. Just on a personal note, if I could add my very best wishes to you and your family. It's been an absolute pleasure, so very best to you. If I may, I'm not wishing to depart from custom. I also have several questions. Firstly, just on those five extra items, is that five extra own-label items, or is that five extra items to the basket? That would be the first one. Thank you.
Nick, I'll jump straight in there because it's a simple one. Again, thanks very much for your kind words. It's five extra products and their own-label products. This is M&S-branded products versus Waitrose-branded products.
Have you seen a step up in your basket size, overall basket size, or just your own-label participation?
Yeah. There is a greater participation of M&S own-label than there was prior to the handover of Waitrose own-label. Yes, own-label.
That is just customers just substituting, right? I guess what I'm trying to say is that if you've seen a jump in five underlying items, then that is clearly quite a sizable dividend to reap from the M&S changeover. I'm just trying to clarify that point.
Yeah. I mean, I think the answer on that is, of course, I think it is, yes. I think that reflects the quality of the M&S range. I think it reflects the fact that there's a lot of products that customers want from M&S. Of course, some of it may be; maybe this will not sustain adding for an item. Some of it may be customers trying out because you think this is the first two weeks, customers trying out all of the M&S product and wanting to experience more of the range. I think it is notable as well, of course, Ocado.com can list more of the great M&S range than often your local M&S can list because they're not all of the M&S stores.
I mean, I think this is just reflective of M&S having a great product range with lots of interesting products and people certainly trying it out, but we think are using it more, which is good. It's good for Ocado Retail. It's good for M&S, and it's good for our customers. We think it's a very good start.
Great. Just to follow up on basket trends, I think the average basket dropped by around GBP 20 across sequential quarters. With your visibility over the exit rate and forward orders, should we expect that sort of quantum drop, which obviously would not be unexpected going forward?
I mean, Nick, I think it's difficult to predict, but I think, as you and everybody will know, this really just depends on the overall behavior in the U.K. With the government helping encourage eating out, as an example, with people increasingly coming back to work, I think there'll be a slight reduction in calories consumed at home. Therefore, yes, I would expect over time the basket size will decline. I and you and none of us really know what might happen around any further lockdowns, local lockdowns, national lockdowns. We can't be completely sure. The winter months will obviously create some potential changes there. Is it going to be the same reduction in the next quarter as in the last quarter? I don't know.
I hope for the nation's sake that we're getting back to normal as soon as possible, and therefore that might be a reduction in basket size.
Great. Just to that point in terms of normalization, and to follow up on an earlier question, could you run through the capacity as it stands on a normalized basis for each CFC at the moment, please, and how we might expect Erith to build in the coming quarters, please?
Yeah. Erith in the quarter is running around, sort of peaking at around just over 120,000 orders per week. Not a sort of a massive step change versus the half-year. We're obviously quite preoccupied with the switchover to M&S as a sort of a bigger focus in the quarter. We'd expect Erith to continue to grow through the balance of this year and obviously into next because at that level, it's still got some decent opportunity to grow into its capacity. The other facilities continue to operate at very high levels. Dordon, in aggregate, for both Ocado.com and Morrisons.com, over 200,000, and Hatfield running at high levels. We're adding the Bristol the handover and Perth week next year, which are sort of round numbers: 30,000, 60,000, and 80,000 orders per week capacity across those three. There's a lot more capacity to come.
I think it's important to note that when we opened Erith, we were able to scale Erith to the same level of handover very, very much quicker than we did at handover. I think that's sort of symptomatic of what you should expect. We'd expect to be able to ramp these new facilities to their maximum level quicker than we've done previously with the human constraint of hiring people rather than a technology constraint in terms of working out how to operate them at high capacities. That's good news. It's good news for Ocado Retail. They can grow faster, but I think it's obviously symptomatic of our capabilities for international clients as well.
Thank you. The last one, if I may, please do talk a little bit about your StorePick solution, perhaps highlighting where the OSP solution differs from those or other solutions around the world for StorePick. Morrisons have clearly been a key customer, and Sobeys have also been talking about the services as kind of a pathfinder recently. It would be interesting to hear your thoughts and a little more detail, please.
Yeah. I mean, I think the StorePick process is, as it were, a simpler process because it's a much more manual process. Our technology strength gives us less opportunity to demonstrate its strength in StorePick. It still uses all the interfaces that we have, which are designed, refined over years of how to operate online grocery. Great search functions, great features on those facilities. It still can use the routing algorithms to optimize and run those facilities, the fleet at the best possible efficiency. It still includes the interfaces for the driver. It gets all of those benefits. Obviously, it's a manual process picking from store, so they're less smart in that technology than you would see in Erith, for example. It's good capability.
Yeah. I was going to ask if you can still see the stock file, so you avoid substitutions or not. I guess that might depend on the partner.
It is. Nick, we're starting to get to sort of quite a detailed level, so maybe we can pick that up another time.
Okay.
I will leave it there. I have more, but I will get to the back of the queue. Thank you very much, sir.
Okay. Thanks, Nick.
Okay. We now go to the line of Rob Joyce at Goldman Sachs. Please go ahead. Rob, your line is now open.
Hi. Good morning, Duncan. Just, yeah, first, I'd like to reiterate the congratulations. Many thanks and best wishes for the future. I've got three, I think I'll go with. Firstly, sorry, I hope I'm not flogging a dead horse, but just to try and understand going into the end of the year now, what kind of capacity do we have in terms of what sales growth could be done with the capacity expected to add to the system in that fourth quarter? I'm presuming 52% would be quite an ask in that fourth quarter. On Erith, do you have an idea when Erith will actually get to the sort of 220 or so orders per week that you hope to do at capacity? And has anything you've seen in the operating of Erith above that half capacity changed your expectations for the output or the economics of that site?
The final one, just I think Tim mentioned, was it a million people on a waiting list or something like that from M&S that you've taken over, or it showed signs of interest? Any update on the numbers in that waiting list at the moment? Thanks very much.
Many thanks, Rob. Quarter four, yes. What we've really experienced and a large part of the quarter three growth, I think people need to understand, was lower comparatives in the prior quarter three because that's typically the time people are away on holiday, rather than adding significant amounts of capacity in quarter three. We are running at the limits of our capacity, and there will be modest capacity growth in percentage terms in the fourth quarter because the only one of our facilities we can add more capacity to, but the others are running at full capacity, is in Erith. It is going to be difficult to sustain the same sales growth in the fourth quarter because it is the absolute levels of sales that we are sustaining and growing modestly rather than the year-on-year growth. That should give you a sense that it will be a lower growth.
I think you should expect a lower growth in the fourth quarter. Lower growth does not mean less demand. It just means we're continuing to serve the same amount of demand. We're not able to grow at the rate we would like to if we had more capacity. Your second question was, how will Erith ramp to full capacity? I think it's uncertain because we've never done it. We never operated a facility at that scale before. I think history says for Ocado, we should expect to get to 80% or 90% of the full capacity in a pretty straight line from where we've gone so far. By the time we could try and squeeze that last 10% out, maybe that will take us a little bit longer. The economics will look very good even then, operating at 90% full capacity.
What I'm certain of, based on my history with Ocado, is ultimately we'll probably end up well more than 100% because that's what we've done on all the previous facilities we've operated. We set a target. We get pretty close to it quite quickly. Getting then to the maximum takes a little bit longer, but ultimately we end up much higher above that. We're well over the predicted capacity in Dordon, as an example, and massively over in Hatfield. Last question, Rob, on M&S. I think the demand from M&S customers is still there. I don't think there's a particular update on that. Remember, we're only two weeks in. Remember, we're capacity constrained, can't serve a lot more customers. The prospects for those M&S customers who want online groceries through Ocado.com, I think, will remain good; it just comes over time as we can grow capacity.
Okay. Thank you very much. I much appreciate it, and all the best.
Thanks, Rob.
Okay. We now go to the line of Xavier Demaine at Bank of America. Please go ahead. Your line is now open.
Hello. Yeah. Can you hear me?
Yes. I can, Xavier.
Yes, you can. Yeah. Thank you for taking my question. Yeah, best wishes, actually, Duncan, for the future. For me, you were just talking about the size of your best customers. I just want to understand what you mean by your best customers when you were trying to open to a bit more customers, I think. Second question, actually, you said you reopened the website in Q3 to new customers. What is the profile of these new customers? Are they coming from the competition? Are they brand new customers to online?
Xavier, thank you again. Yes. I mean, I think best customers for us are they do not have a particular characteristic to make them special. They are just regular shoppers with reasonable basket sizes. Obviously, for us, that typically means families because families with children, there are just more mouths to feed at home, so they consume more groceries at home, and that makes them attractive to us. That is the biggest driver for us of basket size, the size of the household. Xavier, apologies, I have forgotten your second question. Can you remind me?
Yeah. Second question. Yeah. It was just getting new customers, you said in Q3 because you reopened your website. What is the profile of these new customers?
Yeah. Probably not much to say there because the growth in new customers has been quite modest. I do not think there is any sort of indication of a change in type of customers. Without knowing the answer, what I would expect to say on that is that a lot of the customers who have joined us and new to us have shopped somewhere else previously because we find it easier to attract online shoppers from elsewhere, typically. I know, because this is just the nature of the world we live in at the moment, that there is a lot of pent-up demand for online groceries. Some of this would just be new people trying it for the first time when they can.
Okay. Thank you.
Okay. Our next question is over to the line of Simon Bowler at Numis. Please go ahead. Your line is now open.
Morning. Thanks. Just a quick follow-up just on any kind of things to call out on the cost structure within Ocado Retail. You kind of mentioned the idea that there's not a significant need to invest into kind of new customer acquisition, so potentially kind of the marketing line seeing some leverage and also quite a big swing factor in gross margin in the first half. Just any kind of early thoughts about how we should think about that across the second half?
Yeah. Good morning, Simon. Yeah. There are some benefits given the current demand and dynamics. You've already picked up on one, Simon, which is sort of marketing cost. It's a lower marketing cost. I think the scale of demand, the efficiency of the proposition, there's sort of lower customer compensation at the moment. There's less costs associated with things like that. There's less missed deliveries, which is a very small cost to us. It is a good example of the fact when there's such high demand and customers are at home, there's less opportunity for them to forget they've got the delivery coming and not be there, which is a cost to us. We have a number of items like that. Outside of that, there's no significant other trend to pick up on. There's still some cost inflation from wage. We continue to grow the salaries of our employees.
No, there's nothing particular elsewhere. The leverage I referred to earlier is more symptomatic of the fact that as we grow capacity with the same fixed cost, we're seeing that leverage. Of course, note going into next year, opening three facilities during next year, there'll be some additional fixed cost coming into next year, which then we'll see the benefits of the operational leverage in the year and two years after that. No. Simon, a long-winded answer to say there's nothing material on cost to comment on.
Okay. Thanks.
Our final question for today is over to the line of Nick Coulter at Citi. Please go ahead, Nick. Your line is now open.
Hi. Sorry. Just to quickly follow up, if I may, is it possible to talk about the teething issues with the M&S switchover? I guess you inevitably and somewhat understandably had to wind out some wrinkles in processes or product. Then secondly, it being an Ocado Retail trading statement, would it be possible to comment on the ORL consensus at ETA? Please. Clearly, it's going up. Thank you.
Nick, thank you. Yeah. This was a massive undertaking, transferring out 4,000 products, which we were selling up until the last day, and replacing them with 4,400 new products that we were selling them the day after. It was a pretty massive undertaking. The operations actually did incredibly well. We were really pleased with the way that went. We were surprised, but nicely surprised, by a sort of last-minute surge in demand, which ultimately just meant that we were a little bit short of stock right at that last minute, which created that problem. Overall, we're very, very pleased with the handover. I think with only that small issue and that issue driven by extra demand, we're very pleased.
In terms of numbers by segment for us at Ocado Group, Nick, I won't answer that in any specific detail because many of you have different bases to come from. I think what you should take from today's statement is the GBP 26 million to over for at least GBP 40 million, and then simplistically add GBP 14 million to whatever you have in your retail segments. That's simplistically the way to answer that because many of you start in slightly different places. It's not worth getting into the specific figure for each of you. I think that will simply answer your question, hopefully. Super.
Thanks so much, sir. All the best.
Thank you.
With that, can I just pass back to you for any closing comments at this stage?
Thank you, ladies and gentlemen. That concludes our call. We will report next on the 10th of December with Ocado Retail's Q4 trading update. I look forward to speaking to many of you before then. In the meantime, keep well and have a good day. Bye for now.
This now concludes today's call. Thank you all very much for attending, and you can now disconnect.