The crazily competitive supermarket sector is killing Ocado profits -- and shares are crashing

Ocado shares are crashing on Tuesday after the company warned that it faces serious pressure on its profit margins thanks to the intense price war that continues to rage in UK supermarket sector.

Around 8:30 a.m. BST (3:30 a.m. ET) shares in the FTSE 250 listed retailer are down by more than 9% to around £2.93 per share as investors continue to worry about the company’s ability to make money in what is probably the most competitive sector in British business.

“As the market remains very competitive, we are seeing sustained and continuing margin pressure and there is nothing to suggest that this will change in the short term,” CEO Tim Steiner said in a trading update released on Tuesday.

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While Ocado did warn about the squeeze on margins that the price war is causing, it had some positive news, announcing in its trading update that the average number of orders placed by customers increased by 19% year-on-year to 226,000 per week in the last quarter.

“Ocado’s combination of choice, competitive pricing, and industry-leading service has contributed to an increase in average orders by nearly 19%, our best volume performance in more than five years,” Steiner added. It should be noted, however, that the average value of orders fell in the quarter from £111.75 in Q3 last year, to £107.94 now.

Investors are also likely to have been put off by the failure of Ocado to announce any sort of deal with an overseas retailer, something that it has been looking for a while now. Ocado wants to run the online delivery business of an international supermarket as a means of expanding its overseas operations. Retail sector analysts Nick Bubb told the Financial Times that the silence from Ocado on the matter is “deafening.”

Ocado’s shares have been under substantial pressure over the past year or so, falling from more than £4.50 per share in June 2015, to less than £3 now. At one point in June this year, the stock was worth just £2.24.

Ocado has faced a massive challenge in recent months from the launch of Amazon’s AmazonFresh service, a similar grocery delivery platform which has the backing of the world’s most powerful retail firm.

As a result, Ocado is one of the most shorted stocks in the UK. Almost a fifth of its shares are held by investors betting the price will fall, according to Castellain Capital’s Short Tracker site. Blackrock, Discovery Capital, GMT Capital, and Jericho Capital are among the firms holding large negative positions in OCDO.

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