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Shares in online grocer Ocado have fallen more than 11% after reporting a slowdown in sales growth.

Ocado, which sells mostly Waitrose products, said sales rose 16.9% in the 12 weeks to August 7, down from a rate of 20.8% in the previous six months.

The company also said full-year profit margins were likely to rise by less than expected as it invests in improving customer service.

It hopes to expand warehouse capacity to help it keep up with demand.

Ocado is increasing the size and capability of its distribution centre at Hatfield, Hertfordshire.

It said its investments had already improved customer service in the third quarter, with 99% of items delivered as ordered, and 95.5% made on time or early.

Ocado hopes to be able to deal with 140,000 orders per week by the end of the current quarter, compared with 111,000 in its third quarter.

Ocado is also building a new distribution centre in Dordon, Warwickshire, which is expected to be open at the end of 2012.

Earlier this year, Waitrose announced it would be expanding its online presence to within the M25 area, which many retail analysts said would likely take orders away from Ocado.

Ocado was founded in 2001 by three former Goldman Sachs bankers.

Its shares floated at 180 pence in July 2010, but at Monday's close Ocado's shares stood at 118.4p, down 11.4% on the day.