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Ocado warns Brexit could push up supermarket prices

Published 28/06/2016

Ocado has warned that Brexit could cause supermarket prices to rise
Ocado has warned that Brexit could cause supermarket prices to rise

Online grocer Ocado warned Brexit could send supermarket prices surging as the plunging pound pushes up costs for retailers.

Chief executive Tim Steiner said the weaker pound may lead to "inflationary pressure", but assured he did not believe Brexit would spark a sudden crash in the UK retail market.

His comments came as Ocado posted a slowdown in half-year earnings growth amid "significant challenges" in the sector.

Ocado reported a 5.7% rise in underlying pre-tax earnings to £40.4 million for the six months to May 15, against 11.4% growth a year earlier.

But it secured another double-digit rise in retail sales, up 13.9% to £582.9 million, and said it was gaining market share.

The results come as it faces competition from the launch of Amazon's rival fresh food service earlier this month, which saw Ocado's shares plunge to a three-year low earlier this month.

Mr Steiner said the group had seen "absolutely no impact whatsoever" yet from AmazonFresh, but added the firm was "keeping a close eye" on the new competition.

Mr Steiner said the group had seen no impact so far from Brexit on trading and consumer demand.

"We don't believe Brexit will have a significant impact on the business, but we're waiting to see what happens to pricing," he said.

On fears for consumer spending and UK retail, he added: "We're not expecting the whole thing to suddenly collapse."

Ocado imports a lot of its fresh food and produce, as do other supermarkets, and will be impacted by the weak pound making overseas goods more expensive.

It could bring to an end a welcome lengthy spell of falling supermarket prices for shoppers.

But Ocado said the weaker pound would also make its technology more attractive to overseas buyers.

Mr Steiner said ongoing food price deflation and a fierce price war saw the supermarket sector "experience significant challenges during the period".

Ocado's average basket value declined by 2.2% to £110.10 in the first half due to price deflation pressures.

But he added: "Our increasing scale and operational efficiencies meant that we still grew profits, albeit at a slower rate."

Shares in the group surged as much as 10% on its confident outlook.

Ocado said results were boosted by its deal to provide online delivery for Big Four chain Morrisons, with just under £9 million notched up in fees and revenues of £44 million over the first half.

Despite this tie-up, Morrisons is working with Amazon to provide the technology giant with wholesale ambient, fresh and frozen products for its new food offering.

There was still no announcement of Ocado's long-awaited overseas deal alongside half-year results, but the group said talks with " many potential international retailers" were ongoing - with the possibility of "multiple deals" in the future.

FTSE 250-listed Ocado delivers 225,000 orders a week on average, up 17.8% year-on-year in its first half.

It has 541,000 customers, up 14.9% in the half-year as voucher activity and marketing promotions lured back former shoppers, although it revealed it had attracted fewer new customers.

Analysts at Numis Securities said Ocado had seen "solid trading".

But they added: "The lack of deal announcement, competition-led downgrades, and investor concerns around competition - albeit Amazon Fresh is having no impact on trading - look set to continue to weigh on the shares."

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