Free Essay Comprising Ocado Group Financial Report

Ocado Group pure-play model specialized online grocery retailer yields competitiveness and viable market positioning despite fierce competition in the food segment from the multi-format legacy stores. Its growing market share reflects committed investments to support its distribution arrangements and maturing business. The strategy creates a big win in the United Kingdom benefiting from the struggle multi-format legacy retailers face when running online operations. Ocado end-to-end operating model counterbalances its small scale and narrow geographical diversification. The dedicated online presence and running well-diversified customer base give Ocado a crucial differentiating factor manifested in growth in its financial performance and position in the grocery market. This paper analyses Ocado Group' financial and non-financial five-year performance and its corporate governance compliance as the basis for financial strategies to become an FTSE 100 company.

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Business Overview

Founded in 2000, Ocado Group positioning as a disruptive retailer in online grocery segment emerges from transforming how the UK consumer shop for groceries. Ocado runs fully automated customer fulfillment centers through easy-to-use customer software supported through time last miles deliveries. The consistent improvement manifests in revenue growth and increasing market share. It is a testament to Ocado's capability to consistently adapt technology in meeting customer requirements better. Unlike the UK's 'big four' retailers, Ocado utilizes technology-based solutions and intellectual property to enhance its channels to offer solid product and service offering. It safeguards Ocado from incurring costs linked to operating brick-and-mortar store network. Recent brand additions including Marie Caire, Fetch, Sizzle and Fabled expand its portfolio, thereby expanding its active customer base.

Recent brand additions and partnership with third-parties, such as Morrisons and Dobbies Garden Centres, yields right-sized operations and lean-cost base evident in sustained profitability. Ocado utilizes transitional recovery approach to benefit from the positive food sector trends trough growing its customer base and expanding its share in the UK grocery market online. Besides, Ocado approach to offer retail solutions makes it a catalyst for channel shift founded on innovation being a primary identifier in its investment. The continued investment in artificial intelligence and robotics enriches Ocado Group's disruptive capabilities. This positions it to benefit from the sustained channel shift towards online shopping. The superior customer offering backed by operational leverage in end-to-end structure makes Ocado the world largest supermarket that offers dedicated online grocery.

Financial Performance

(PS Million) 2013 2014 2015 2016 2017

Revenue 792 948 1,107 1,271 1,463

Cost of revenue 545 636 733 836 960

Gross Profit 248 313 375 435 504

Gross Margin % 31.3% 33.0% 33.9% 34.2% 34.4%

Total operating expense 251 299 356 428 504

Operating Income -3 14 19 7 0

Net Income -13 7 12 12 1

EBITDA 38 72 81 83 86

Interest Expense 7 10 9 10 14

Profitability

Ocado Group realizes sustained growth in profit in its retail business backed by continued investments in expanding customer propositions. Although facing the rising input costs witnessed in the grocery retail segment, addressing market challenges translates to raising revenue. The evaluation of five-year performance reveals eighty-five percent revenue growth from PS792 million in 2013 to PS1,463 million in 2017. While the comparative revenue growth has declined by 20% in 2014, 17% in 2015 before stagnating at 15% in 2016 and 2017, Ocado still leads with the UK grocery market realizing modest growth. Considering the market context, the five-year performance indicates that Ocado Group comprehensive strategy is still the right approach. However, the rising costs witnessed in the UK's grocery market translates to the increased cost of revenue.

The rising cost in the UK's grocery market manifests in the increasing operating expenses eroding the rising revenue generation. The operating expense has increased by seventy-six percent from PS545 million in 2013 to PS960 million in 2017. Although committed to continued investment in technology innovation and maximizing efficiency through operational improvement, revenue growth remains strangled by rising cost of revenue. Again, efforts to decrease costs per order are hardly enough with Ocado profitability eroded by wider market trends, including increasing labor rates.

Ocado Group Income Statement - Horizontal Analysis Extract

2013 2014 2015 2016 2017

Revenue 100% 100% 100% 100% 100%

Cost of Revenue 68.81% 67.09% 66.21% 65.77% 65.62%

Total Operating Expense 31.69% 31.54% 32.16% 33.67% 34.45%

Operating Income -0.4% 1.5% 1.7% 0.6% 0.0%

Net Income -1.64% 0.74% 1.08% 0.94% 0.07%

Interest Expense 0.88% 1.05% 0.81% 0.79% 0.96%

From the horizontal analysis extract captured in Figure 2 above, Ocado is realizing the decreasing cost of revenue. Since 2013, the cost of revenue per income earned is declining as Ocado Group realizes operation improvement. The horizontal analysis extract above shows declining trend on the cost of revenue to sales percentage from 68.81% in 2013 to 65.52% in 2017. Nevertheless, the inflationary pressure resurfaces in increased operating expenses that have increased from 31.69% in 2013 to 34.45% in 2017. The inflationary cost reflects 101% increase in operating expense from 251 million in 2013 to 504 million in 2017 with the majority contributed by rising sales and general expenses.

Ocado Group Five-year Profitability

2013 2014 2015 2016 2017

Net Margin % -1.58 0.77 1.07 0.94 0.07

Asset Turnover 1.67 1.83 1.96 1.97 1.84

Return on Assets -2.64 1.41 2.09 1.86 0.13

Return on Equity -6.13 3.47 5.13 4.76 0.38

Return on Invested Capital -1.6 4.32 5.19 4.82 2.61

Interest coverage -0.74 1.75 2.27 2.25 1.07

The exposure to rising operating expenses and cost of revenue erodes the net margin percentage as displayed in Figure 3 above. The performance indicates struggle to reduce the high-cost exposure in processing the orders. Although the company realized an expanded customer base from 580,000 in 2016 to 645,000 in 2017, the average order size appears to decline. Such arises when the UK's grocery market experience increased pressure leaving retailers to bear low margins. Figure 3 above shows Ocado recovering its interest coverage from -0.74 in 2013 to accomplish 1.75 that increased steadily to 2.27 in 2015 before a nosedive to 2.25 in 2016 and 1.07 in 2017. Despite the decline, Ocado has sufficient cover to meet interest obligations from its net income.

Investment Returns

Despite its small size compared to the multi-format legacy retailers, Ocado has realized the increasing return on equity and invested capital in 2014 and 2015 recovering from the 2013 slump. However, the recovery turned short-lived with the company realizing declined performance in 2016 and recording the worst performance in 2017. From Figure 3 above, the return on assets declined from 2.09 in 2015 to 1.86 in 2016 and 0.13. It shows the inability of the company to utilize the net assets to generate more revenue. The three-year growth cycle of its return on equity stopped in 2016 with a 0.37 decline from 5.13 in 2015 and recent 4.38 in 2017. Judged by the recent two-year performance, Ocado is struggling to generate profit from money invested by shareholders.

Ocado realized an increasing return on assets recovering from -2.64 in 2013 to attain 1.41 in 2014 and 2.09 in 2015 before declining to 1.86 in 2016 and 0.13 in 2017. The slump witnessed in 2016 shows declining capability to utilize the assets to generate sales. Still, Ocado had its net asset value increasing at a decelerating rate from 11% in 2015 to 9% in 2016 and 3% in 2017. The modest growth in the net assets value emerges from higher growth in the liabilities relative to the assets increase. Particularly, Ocado the total liabilities in 2016 and 2017 reduced rose by twenty-five and forty-two percent respectively relative to eighteen and twenty-eight percent growth in total assets within the same period as captured in Figure 4 below. The increasing trend in Ocado's asset turnover shows increasing efficiency in the utilization of its assets to generate sales income. Its asset turnover increased from 1.67 in 2013 to 1.97 in 2016. However, Ocado has a sluggish performance with typical retailers generating higher asset turnover from their ability to realize higher sales revenue from relatively small asset bases. It indicates likely longer collection period and lax approach leading to higher accounts receivable. In addition, failure to utilize the fixed assets efficiently in 2017 amidst ambitious investment led to increasing idle resources and partial utilization of the fixed assets capacity.

2013 2014 2015 2016 2017

Revenue (PS Million) 792 948 1,107 1,271 1,463

Total Assets (PS Million) 498 538 592 701 895

% Change in Total Assets - 8% 10% 18% 28%

Total Liabilities (PS Million) 296 320 350 438 624

% Change in Total Liabilities - 8% 9% 25% 42%

Net Assets Value 202 218 242 263 271

% Change in Net Asset Value - 8% 11% 9% 3%

Asset Turnover 1.67 1.83 1.96 1.97 1.84

Return on Assets -2.64 1.41 2.09 1.86 0.13

Liquidity

The pursuit of operational improvements and technological innovation amidst its small size warrants a tighter working capital management policy. Unlike the multi-format legacy retailers, Ocado Group operates from a marginal current assets base. Although the grocery retailer realized increased total current assets by forty-four percent from PS180 million in 2013 to PS260 million in 2017. Affected by the higher rate of obsolescence, Ocado Group experienced the reduced total current asset to PS147 million in 2014 and PS137 million in 2015. However, the devotion to minimizing cost per orders revealed in rising current assets in 2016 by nine percent to PS150 million and seventy-three percent growth to realize PS260 million in 2017.

Since 2013, Ocado Group has experienced declining current ratio from 1.13 in 2013 to 0.52 in 2016. It showed declining ability to settle its obligations as they fall due. It arises from increasing reliance on debt financing from PS159 million in 2013 increasing by six percent to 168 million in 2014 and seventeen percent to 2015 in PS196 million. Ocado replicated the growth with a forty-eight percent increase in 2016 to PS291 million before a twelve percent trump in 2017 to PS257 million. A similar pattern is evident for its quick ratio indicating the inability to pay off its current liabilities using its most liquid assets. The quick ratio has declined from 0.98 in 2013 to 0.71 in 2014 to 0.55 in 2015 to 0.38 in 2016 before the turnaround in 2017 to realize 0.84 in 2017 as shown in Figure 4. It reflects the movement in liabilities from 2013 to 2016 till the decline by PS34 million from PS291 million in 2016 to PS257 million in 2017.

2013 2014 2015 2016 2017

Total Current Assets (PS Million) 180 147 137 150 260

Total Current liabilities (PS Million) 159 168 196 291 257

Current Ratio 1.13 0.88 0.70 0.52 1.01

Inventories (PS Million) 24 28 30 39 43

Current Assets - Inventories (PS Million) 156 119 107 111 217

Quick Ratio 0.98 0.71 0.55 0.38 0.84