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Ocado hit by driver shortage and fire disruption costs

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Ocado hit by driver shortage and fire disruption costs
Ocado said the £5m spend reflects measures taken to hire new staff, including raising hourly rates and offering signing-on bonuses for heavy goods vehicle drivers. Photo: Paul Ellis/AFP

Online grocer Ocado (OCDO.L) has said that rising costs of labour and a shortage of delivery drivers may result in a £5m ($6.9m) hit this year.

The company, which is a joint venture between Ocado Group and Marks & Spencer (MKS.L) said the spend reflects measures taken to hire new staff, including raising hourly rates and offering signing-on bonuses for heavy goods vehicle (HGV) drivers.

It comes as the UK is facing a national driver shortage caused by the pandemic, Brexit and a surge in online shopping.

"Rising costs of labour, particularly for large goods vehicles and delivery drivers represent an increasingly important issue for the industry," Ocado said, adding that it will work to “mitigate these costs as best we can.”

Read more: UK service sector growth slows amid staff shortages and supply chain disruption

It also revealed that a fire at its Erith customer fulfilment centre, caused by a collision of three robots, resulted in a loss of around 300,000 orders, or £35m of revenue.

Due to the disaster in south-east London in July, sales declined 19%, Ocado said. As well as having to cancel orders in the week following the fire, the temporary reduction in capacity reduced the firm’s ability to offer slots to new customers.

The business disruption will cost Ocado £10m, as well as another £10m for stock and other write-offs. The resulting net cost, not covered by insurance, is estimated to also be £10m, which will drag down profits for the current year, it said.

The fire was the third to hit an Ocado warehouse in the space of three years, with its site in Andover, Hampshire, only recently returning to full operation two years after a blaze.

Ocado shares fell on Tuesday on the back of the news. Chart: Yahoo Finance
Ocado shares fell on Tuesday on the back of the news. Chart: Yahoo Finance

In a trading update for the 13 weeks to 29 August, the online retailer reported a 10.6% fall in sales to £517.5m. Revenues were down 1.8% in the first six weeks of the period, but worsened in the remaining seven weeks (down 19%) due to the fire.

Ocado said it had added a record number of new customers — up 64,000 to 805,000. Orders per week jumped 22%, however the average basket size decreased by 12% to £124, compared to £141 a year ago.

The company said it had increased capacity at its warehouses in Essex and Hampshire, taking total capacity when fully ramped to just over 600,000 orders per week.

Looking forward, Ocado forecasts “strong” revenue growth in its 2021-22 year and beyond, with new warehouses set to open in Bicester and Luton. This will extend total capacity even further to around 700,000 orders per week.

Read more: UK job vacancies surge to over 1 million for first time ever

Tim Steiner, chairman of Ocado Retail, said: "Despite the challenges we faced in the period, I am delighted to report that Ocado Retail is performing well, improving the customer experience even further and continuing to grow the business in a post-lockdown environment."

Shares in the company fell as much as 5% in early trade in London.

“As we head into the most important trading period of the retailer’s year, it’s crucial that all dents have been ironed out, so it can fully capitalise on the festive season,” Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said.

“Prior to the fire, sales were still subdued. That’s largely a result of the exceptional demand brought on by the pandemic this time last year.

“Equal partner M&S has invested a lot in this partnership, and it’s a key pillar of its turnaround plan — getting sales moving at pace again will be top of the to-do list.”

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