Why Can Ocado Group PLC Grow Its Sales, But Wm. Morrison Supermarkets plc Can’t?

Today’s update from Ocado (LSE: OCDO) is positive and shows that the company is continuing to deliver excellent sales growth. Certainly, top line growth in the final quarter of its financial year is behind that of previous quarters and the average order size has fallen by 1.7%, however it still shows that Ocado is delivering stunning sales growth during a challenging period for the supermarket sector.

For example, Ocado’s gross retail sales rose by 14.9% in the quarter, while for the full year it has posted growth of 15.3%. Both of these figures are considerably ahead of the vast majority of other supermarkets, with only no-frills operators such as Aldi and Lidl able to compete in terms of top line growth.

Online Opportunity

The main reason for Ocado’s superb sales growth is its exposure to a facet of the supermarket space that is still offering relatively high levels of growth: online. Unlike many of its grocery peers, it does not have the costs associated with stores and, as a result, is able to keep prices lower than they otherwise would be. In addition, less than 5% of consumers shop online for their groceries, but this is expected to rise to over 8% during the next five years, which shows that while online is a relatively lucrative market now, it has the potential to become even more so over the medium to long term.

Late To The Party

While Ocado is posting strong sales numbers, Morrisons (LSE: MRW) has been ‘late to the party’ in terms of its online offering. It was rolled out in haste in 2014 (using Ocado technology) and, although it should help Morrisons to post improved sales figures moving forward, it remains in a state of ‘catch-up’ versus its supermarket peers and, as a result, it may require more time in order to make a real difference to the company’s top line.

In addition, and unlike Ocado, Morrisons has also suffered from the transition of consumers away from large footprint supermarkets and towards online. Looking ahead, though, its online presence should help it to take advantage of this trend over the medium term.

The Bottom Line

While Morrisons’ sales growth may be disappointing when compared to Ocado’s, its bottom line remains much healthier than that of its purely online peer. For example, while Ocado is yet to make a profit, Morrisons is on course to post pre-tax earnings of £394 million in the current year. Certainly, this level of profitability is down on previous years, but Morrisons remains a much more profitable entity than Ocado.

Looking Ahead

With less than 5% of consumers shopping online for their groceries, it does not appear as though Morrisons is too late to take advantage of a structural shift in the industry. Of course, it does mean that its sales are suffering at the moment versus a pure play online grocer such as Ocado. However, when it comes to profitability, Morrisons remains far ahead of Ocado and, while Ocado may deliver a profit in the current year, challenging market conditions could mean that its bottom line progress is slower than many investors would like it to be.

As a result, Morrisons seems to be the better investment. It trades on a price to earnings (P/E) ratio of 14.3, which is less than the FTSE 100, and comes with a yield of 5.9%, both of which appear to make it a more appealing ‘buy’ than Ocado at the present time.

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Peter Stephens owns shares of Morrisons. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.