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Ocado shares drop sharply after chief executive warns over profit margins

Published 13/09/2016

Ocado posted a 15.4% rise in gross sales to £314 million in its third quarter to August 7
Ocado posted a 15.4% rise in gross sales to £314 million in its third quarter to August 7

Online grocer Ocado saw shares slump after warning over a "sustained" hit from the sector's fierce price war and said there was no sign of a let-up.

The stock plunged by as much as 15% as chief executive Tim Steiner cautioned over the group's profit margins, which are being squeezed as supermarkets slash prices in the face of increased competition.

The gloomy outlook overshadowed an otherwise impressive trading statement, with its best rise in sales by volume in more than five years.

Ocado posted a 15.4% rise in gross sales to £314 million in its third quarter to August 7, with retail sales up 13.6% at £286.4 million.

Average orders leapt almost 19% higher to 226,000 a week, but in a sign of the toll taken by the ongoing price war, it revealed that average orders were 3.4% lower at £107.94.

Mr Steiner said: "As the market remains very competitive, w e are seeing sustained and continuing margin pressure and there is nothing to suggest that this will change in the short term."

It is the latest warning from Ocado as the sector comes under intense pressure from the likes of discounters Aldi and Lidl, as well as the recent launch of Amazon's rival fresh food service.

Ocado's shares plunged to a three-year low in June after the arrival of AmazonFresh, although the stock has since recovered.

Ocado said in June soon after A mazonFresh launched that it had seen "no impact whatsoever", but it did alert over "significant challenges" in the sector.

The pound's plunge since the Brexit vote is also putting extra pressure on profits as it makes it more expensive for retailers to import food.

George Salmon, equity analyst at Hargreaves Lansdown, said: "There aren't many retailers who can turn a blind eye to Amazon turning up in their back yard, and Ocado is no exception.

"Despite higher sales and order numbers, competitive forces are likely to keep margins under pressure for some time."

Analysts also raised concerns that there was no sign once again of any international deal for Ocado.

The group had originally said it hoped to strike a deal by the end of last year.

Independent retail expert Nick Bubb said despite the opportunity to update on long-awaited tie-up talks, Ocado's "silence is deafening".

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