Ocado has moved to within 10% of the stock market valuation of Tesco, the UK’s biggest retailer, after a share price surge linked to the online specialist’s new tie-up with Marks & Spencer boosted its market value to a record £19.5bn.
Tesco is valued at £21.5bn despite controlling nearly 27% of the UK grocery market. By comparison Ocado, which is already worth more than double the combined value of Sainsbury’s and Morrisons, sells just 1.7% of the UK’s groceries.
Investors have fallen in love with Ocado on the back of the success of its tech business Ocado Solutions, which sells its grocery-picking expertise to foreign supermarkets.
On Tuesday, Ocado’s shares closed up nearly 11% at a record high of £26.08 after it said this month’s switch to delivering M&S rather than Waitrose branded groceries had gone well.
The launch was marred by complaints after some customers orders were cancelled but Duncan Tatton-Brown, Ocado’s chief financial officer, said that, given the huge operational challenge presented by the overnight switchover, it had gone very well. “Overall, we and our customers have been very pleased by the transition,” he said.
Ocado said shoppers had responded positively to its new grocery partner, with demand for M&S food, including its popular ready meals and bags of Percy Pig sweets, “driving both an increase in the number of products in customer baskets and strong forward demand”.
The M&S launch has been closely watched by the retail industry after Ocado and Waitrose ended a 20-year partnership.
When the tie-up with M&S was announced last year some analysts suggested the online grocer risked a customer exodus as shoppers were loyal to Waitrose and did not see M&S products as an adequate replacement. Waitrose has embarked on a marketing push of its own to persuade customers to move to its website.
A fortnight in there is so far no sign of that prediction coming true. Tatton-Brown said the number of shoppers turning their back on its service was “very, very low”. “Amongst our loyal shoppers it is tiny numbers and as yet we don’t really know whether they are among the lucky few who have got away for a holiday for a couple of weeks,” he said.
The initial range of 4,400 M&S food products replaced about 4,000 from Waitrose, with the online grocer billing them as “high-quality alternatives at the same or better prices”.
Excitement around the launch saw shoppers typically buy five more items with the average basket containing more M&S products than had been the case with Waitrose, Ocado said.
The coronavirus pandemic has triggered a boom in online shopping with online grocery sales up 77% over the past four weeks, according to industry analysts Kantar. At the height of the pandemic online food sales nearly doubled but, despite the recent slowdown, they now account for 12.5% of total grocery sales versus about 7% pre-crisis.
In July, Ocado said there were 1 million customers waiting to join its service. Tatton-Brown said it had been unable to make dramatic inroads into the list as its delivery service, with orders picked by robots in centralised warehouses, was already running at full pelt. Sales at Ocado Retail, Ocado’s joint venture with M&S, were up 52% in the 13 weeks to 30 August.
