Both Ocado and Deliveroo have warned of a potential slowdown in their businesses. Retail Week looks at how the two digital food retailers are looking to navigate the headwinds
For its first-quarter results, Ocado reported a 5.7% drop in revenues to £564.7m and a 15% decrease in average basket sizes to £124 on a year-on-year basis.
Deliveroo, meanwhile, recorded a 40% widening of losses to £298.2m in its 2021 financial year, despite revenues surging 57% to £1.8bn.
While the most recent figures were subdued for both businesses, the bigger worry is for the longer-term outlook for both brands.
As a result of spiralling costs and customers returning to more pre-Covid behaviours, both have warned of a slowdown this year.
Ocado chief executive Tim Steiner downgraded its sales forecast for the year from the “low teens to around 10%”.
Deliveroo founder Will Shu predicted an unusually broad range of between 15% and 25% order growth for the year, which “reflects current uncertainties”.
How are these two pandemic winners looking to react to the latest headwinds?
Energy price surge
The Russian invasion of Ukraine has exacerbated already rocketing energy and petrol prices in the UK and around the world. The average price of a litre of petrol has hit £1.65, at the time of writing, while diesel has reached £1.75.
Energy prices are also rising, hitting customers and businesses alike with escalating costs.
Ocado Retail chief financial officer Niall McBride said the energy crisis was affecting the online retailer in two ways: “Our [customer fulfilment centres] have great big chill compartments in them and they require a lot of energy. We also have a fleet of vans, which require a lot of fuel.
“The increases in the price we’ve seen over the last little while, we’re not alone on that.”
However, McBride said the business has been making switches to more energy-efficient distribution centres, low-carbon fuel vehicles and more sustainably sourced materials, meaning it has a “lower energy footprint” than its competitors, which will insulate customers from some price rises.
Deliveroo is being affected by the energy crisis in a different way. More than 90% of its deliveries are made by riders on two wheels – either bicycles or motorised scooters – which cuts petrol costs significantly compared with cars or delivery vans.
Despite this, Shu has unveiled a new partnership between Deliveroo and Shell in the UK. “This allows riders to get a discount if they buy petrol at Shell stations because this is an area that we are looking at very carefully,” he said.
Shu said the impact the energy crisis would have on its partner restaurants and grocers was the driving factor in “why we’re being cautious on our guidance”.
”We’re trying to be realistic because we don’t know what’s going to happen,” he added.
Biting off more than they can chew
Food price inflation is another area hitting both businesses and consumers. It hit a 30-year high of 5% in the UK in January, with John Lewis Partnership and Deliveroo partner Waitrose chair Sharon White warning of double-digit inflation later in the year.
While Ocado’s Steiner said the pureplay grocer had increased prices on some items “in line with the market”, he insisted the business was “seeing less item price inflation than I’ve read about”.
“Our average item price has risen less than that, so we’re seeing it at an extremely low level. Less than wage inflation. Less than everybody’s talking about. We’re largely a price follower. We largely try and map the price ranges of our major competitors overall,” he added.
Ocado said it has been “working closely with suppliers where appropriate to actively manage this level of inflation”.
While Deliveroo cannot mitigate costs being passed on from its partner restaurants, Shu said the food delivery app has launched membership schemes for customers that can lower delivery costs such as Deliveroo Plus.
He said Deliveroo grew its Plus membership fourfold in the UK in 2021 and was looking to add to its more than 100 Editions dark kitchens this year. He also praised its tie-ups with major grocers in the UK.
“Food prices are definitely going up, but we don’t control price,” said Shu. “I’d also say that a big part of our business – especially in the UK – is groceries and people do need to eat.”
Out on the town
All Covid-19 restrictions in England were dropped by the government in late February, though the majority of the most stringent measures ended in April 2021.
Ocado said a big part of the sales drop it had seen in the first quarter was down to customers’ “euphoria” at being able to go out and about again.
Steiner said customers eating out again had hit revenues in the first quarter, but it was “really good news” that this quarter would be the last comparing lockdown and post-lockdown revenues.
He said during lockdowns people had “expanded their horizons” in terms of food and maintained that Ocado would continue winning new customers as it adds more delivery capacity this year.
“We have grown our active customer base 31% year on year to 835,000,” he said. “It is this growth in new customer acquisition that gives us the confidence to invest in additional capacity to grow the business”.
Deliveroo has warned that new customer acquisition will be both more difficult and expensive. As a result, the app has promised to scale back on some areas of investment and marketing spend with an eye to driving “durable, long-term value”.
Shu said he was “particularly excited” about the potential for Deliveroo to partner with more FMCG brands.
“This is an area that is super-early in development, in particular, compared with our restaurant ads platform, which is live. But it is a proven large opportunity for online platforms and it already represents a meaningful part of revenues for some players,” Shu said.
He also said Deliveroo would look at scaling up its ad revenue business and further additions in grocery, its rapid-delivery Hop service and even “potentially” looking at non-food.
As a result of all of this, Shu said Deliveroo was aiming to reach break-even on an underlying basis “at some point” between the second half of 2023 and the first half of 2024.
Despite being two very different businesses with very different models, Ocado and Deliveroo’s travails highlight the wider pressures facing the sector.
As standards of living fall and people return to offices and socialising more, the success or failure of these retailers could be a bellwether for the online food space as a whole.
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