LONDON BRIEFING:WHEN OCADO floated last year, the joke doing the rounds in the City was that it started with an "O" and ended with an "O" – and was worth exactly that: zero.

The internet grocery delivery group hasn’t quite matched worst expectations but its performance in the 14 months since going public has been distinctly uninspiring – and after the company’s latest lacklustre trading update, it’s certainly a lot closer to zero than it was before.

Investors who bought into the much-hyped Ocado story last year paid 180p for their shares. This was regarded as a knockdown price at the time as worries about structural flaws in its business model – it does not have its own chain of stores but instead fulfils orders from a dedicated warehouse – saw the mooted price tag reduced from £1.3 billion (€1.49 billion) to £937 million.

Now, after tumbling 10 per cent on Monday, the shares are languishing at about 118p – more than 30 per cent below the float price and valuing the business at just over £600 million.

Behind the latest wobble was the company’s admission that sales growth has slowed as its massive warehouse struggles to keep pace with demand and that margin growth this year will not match earlier expectations.

There have also been some problems with the generally excellent service for which the group is known, although these now appear to have been resolved, with 99 per cent of items delivered as ordered and 95.5 per cent of deliveries arriving on time or early.

Perhaps the biggest worry, though, is that Ocado appears to have become embroiled in a costly and ultimately unsustainable voucher war with Waitrose – the supermarket group whose products it distributes – as the two battle it out for customers in the lucrative London market.

Ocado has been delivering Waitrose groceries for the best part of a decade and signed a new 10-year agreement with the John Lewis-owned supermarket chain last year. Crucially, however, that new deal allowed Waitrose to compete with Ocado in the London area for the first time and it has now set up its own internet delivery business for the capital.

The two companies are going head to head and Waitrose has been spending heavily to promote its service, including offering free delivery to customers who spend more than £50.

Having sold its remaining Ocado stake in February, John Lewis no longer has any financial exposure to its grocery delivery rival and has stepped up competition significantly in recent months. As one analyst noted, with no remaining financial involvement in Ocado, Waitrose has little incentive to “go easy”.

Ocado has responded by offering 25 per cent-off vouchers on some orders, along with a raft of discounted delivery deals and cut-price products. Little wonder that margin growth will not match earlier expectations.

Ocado has yet to report a full- year profit and rapid sales growth is one of the keys to its transition from loss-making start-up to financially sound business.

Its sales growth in the 12 weeks to August 7th was 16.9 per cent, to £149 million, a figure that might look healthy enough in comparison with store-based supermarkets but which represents a slowdown on the previous quarter and on the first quarter, when growth was running at almost 25 per cent.

The performance disappointed analysts, who have cut their sales and profits forecasts for the company several times over the past year. Some analysts are now forecasting operating profits will be as low as £3 million this year – a dismal performance for a firm that has been in business for 11 years.

Ocado is spending heavily on its huge warehouse in Hertfordshire and says it will be able to process 140,000 orders a week by the end of the year, up from about 110,000 currently. By the end of next year, the capacity at Hertfordshire will rise to 180,000, and a second warehouse should also be up and running by then.

But is capacity Ocado’s biggest problem? Or is it the growing competition not just from Waitrose but from other supermarket groups such as Tesco, which is beefing up the service elements of its own delivery service?

The management team at Ocado, which was founded by three former Goldman Sachs bankers, remains convinced that the business can produce sustainable profit growth, although it seems that every trading update has the analysts scrabbling to reduce their forecasts yet again.

Ocado’s customers are happy – it is widely regarded as the best delivery service around and, if you’re getting 25 per cent off, extremely good value. But what’s good value for customers is not good value for investors, as Ocado customers who bought shares in the float have now discovered for themselves.

Fiona Walsh writes for the Guardian newspaper in London