Ocado Group PLC (LSE:OCDO) shares were downgraded to 'reduce' at HSBC and its target price slashed to 575p from 1000p after the online retailer warned earlier this month of falling sales as under pressure shoppers rein in spending.
The broker said the recent profit warning highlighted challenges with the model - mainly lower profits as sales fall and incremental cost pressures from energy, dry ice, and fuel.
Penny-counting shoppers are also putting less goods in their baskets, with HSBC saying basket sizes were down 6% in the third quarter of 2022.
Analysts at the bank said although order and customer growth were up year-on-year, this was largely against the backdrop of an increase in vouchering, which raises "questions with regard to customer retention/order frequency”.
Additionally, while the retailer and technology business benefitted from a surge in contract wins due to businesses increasing their online capacity during Covid, recent contracts “have been limited and small.”
HSBC also said that automation, in some markets, lacks attraction due to the cheap labour available.
While it is investing to make its tech more affordable, with the intention of unlocking new demand, this could pose challenges with existing contracts, which are priced higher and could lead to them being switched, HSBC added.