Ocado Group PLC (LON:OCDO) revealed that Ocado Retail, the online grocery joint venture with Marks & Spencer Group PLC (LON:MKS), has had to switch off its mobile app after growth in orders and revenues of just over 10% in the first quarter to 1 March doubled in recent weeks due to coronavirus stockpiling.
But the panic buying has put the business under “unprecedented strain” leading to the company “taking all measures to ensure that our service remains as close to normal as possible and to meet as much of the demand as we can”.
Overnight, the website was shut as all delivery capacity for the coming days had been sold and the company said it was making changes to ensure distribution of products and delivery slots was “as fair as possible”.
At the start of the month, with panic buying of toilet roll, hand-wash and tinned and other long-life food staples witnessed across the supermarket sector, Ocado sent an email advising customers to place an order earlier than usual due to delivery slots filling up faster than usual.
Registration for new customers has also been paused in recent days, with Ocado also switching off its mobile app under the surge of demand from worried households.
Since concerns about coronavirus have escalated, the company confirmed that order demand and basket size has increased above the £110.24 seen in the first quarter.
To protect employees and customers from possible transmission of the virus, deliveries are only being made to the doorstep of customers' homes, while drivers have stopped taking customers’ used plastic bags for recycling and the company is using temperature scanners at the entrances to its warehouses.
“However Coronavirus unfolds, what is clear is that the fundamentals at Ocado Retail are strong,” said Melanie Smith, chief executive of Ocado Retail, despite having to shut down the website and app.
Retail revenue in the first 13 weeks of the financial year rose 10.3% to £441.2mln on a 10.2% increase in orders to 343,000 per week, though Smith said the surge in demand from stockpiling is expected to “unwind at some point”.
Preparations for the switchover from Waitrose products to M&S in September “are on track”, she said, and full-year retail revenue guidance of 10-15% was left unchanged.
Shares in Ocado fell 8% to 1,364p on Thursday morning, having risen 18% since the start of the year.
Analysts at Hargreaves Lansdown said: “There may be some capacity constraints at the moment but we still think Ocado’s in a good spot. As the pandemic progresses we expect more people will want, or be forced, to avoid physical shops.
“Ocado’s online-only offer means it should be able to capture a fair chunk of business, even as shopping habits start to become less frenzied."
Noting that half the retail business no longer belongs to Ocado, meaning the Ocado Solutions business selling the technology used in its robotic warehouses is the one that should move the dial for the group in future, though there were no comments on this element.
“If coronavirus causes a prolonged period of economic uncertainty, some retail chains could be less willing to spend heavily on expansion, which would be a sore point for Ocado.
“On the other hand we could see a longer-term shift in consumer habits as millions of us stay at home and become accustomed to online shopping. If global retailers then decide to boost their own online offerings in response, this would be a serious tailwind for Ocado. As of yet, it’s too soon to say how this is going to play out.”
At broker Shore Capital, analysts said: “Ocado Retail is letting a lot of its customers down at this very peculiar and remarkable time and as such has had to introduce measures to control demand.”
But at Peel Hunt they said the forced changes “all make sense in this unusual time and are to ensure existing orders are fulfilled at the level of quality and service existing customers expect”.
“However, we highlight once again that the current climate demonstrates the need for a centralised picking model, versus a store pick, that can control stock, customer demand, and plan appropriately in uncertain times. We believe the eyes of the world (including potential future international partners) are watching how it can be done.”