Ocado is in a “much better position” to weather the storm of deflation and gross margin attrition than Tesco, a bullish Tim Steiner has claimed.
The online retailer’s CEO played down the significance of Tesco’s escalation of the 2015 price war, labelling the retailer’s cuts on brands not as major as its earlier action on own label.
“The wonderful thing about selling Branston Pickle and Marmite cheaply is it takes a long time to get through a tub, so it doesn’t make much of a dent in sales,” Steiner said. “The cuts look significant but actually don’t have that much impact.”
Ocado price-matches customers’ baskets with Tesco through its Low Price Promise (LPP) scheme, but Steiner said he was not concerned about the impact of the latest Tesco cuts. A 1% hit on margins driven by price cuts would cost Tesco £450m in profitability on its £45bn UK sales compared with just £10m on Ocado’s £1bn revenues, he said. “We’re in a much better position to weather the storm of deflation and negative margin than they are.”
He added the cost of the LPP scheme had actually fallen in the 12 months to 30 November. By the end of the period, when checking for LPP, more than three quarters of baskets were already cheaper at Ocado, the company said. “Our pre-LPP price position got more competitive versus Tesco in the year, so we actually did more investment than they did,” Steiner added. “And I expect that trend possibly to continue.”
Steiner also brushed aside worries over a break clause that could put an end to its partnership with Waitrose as early as 2017. Less than 10% of Ocado’s growing SKU count were now Waitrose products, with the premium retailer contributing only about 40% to group sales, he said.
Ocado’s own-label grew by 40% in 2014, representing almost 30% of total own-label products – the maximum allowed under the Waitrose deal.
”We are massively diversified away from Waitrose,” Steiner added. “I’m very confident and I don’t think a change is coming, but if it does then it doesn’t worry us.”
Ocado filed its first annual pre-tax profit, of £7.2m, after 15 years of trading on Tuesday as revenue grew 19.8% to £948.9m.
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