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Ocado’s joint venture with M&S is forging ahead

The boosts of the festive period and a possibly permanent shift to online shopping summon good results.

Article updated: 18 March 2021 11:00am Author: Richard Hunter

Revenues rose by 40% to £599 million, comfortably ahead of expectations and with the number of average orders per week growing by 2.5% to 329000. Trading strength over the festive period also bolstered an average basket size which typically included 25% of M&S products, giving some justification to the costly joint venture which is Ocado Retail.

In terms of outlook, the company will now come up against tough comparatives as the full effects of lockdown in 2020 will be the yardstick. Ocado is increasingly confident that the shift to online grocery shopping is permanent, with the pandemic providing a boost which rapidly brought forward what had been a slowly evolving trend.

It therefore plans to continue its expansion of both standard Customer Fulfilment Centres and also mini-CFCs designed to serve a local audience. For the latter, the company is currently looking at a minimum of 12 new micro sites with a London bias in order to serve the Ocado Zoom concept of deliveries within one hour of ordering.

Passing reference was also made to the real driver of the business and indeed the share price over recent times, in terms of the Solutions arm, and in particular international expansion. The imminent opening of the first CFCs in support of the tie-up with US company Kroger, initially hailed as a transformational deal when agreed, will attract particular attention.

The trading update by definition avoids the concerns that these international deals need not only to repay Ocado’s capital heavy investment, but need also to continue to grow in number to fulfil the general drain on long-term resources. There is little doubt that this potential exists given Ocado’s leading-edge technology, but expectations are now running high to the extent that share price growth is showing some signs of cooling.

The shares have drifted 23% over the last six months, although the longer term performance remains one of breathtaking growth. Despite the recent wobble, the shares are up by 53% over the last year, as compared to a gain of 33% for the wider FTSE100, and over the last five years have added 600%.

The market consensus of the shares has for some time reflected the fact that the shares may be up with events, as new developments are awaited, and currently stands at a weak hold. The company overall may be well-positioned to continue its successful trajectory, but Ocado’s ability pleasantly to surprise will be increasingly difficult to deliver.

More from Richard Hunter: read more articles directly on the interactive investor website.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Richard Hunter

Head of Markets, interactive investor

Richard has over 30 years of stockmarket experience and is one of the UK’s foremost commentators on market matters and a regular contributor for the BBC (BBC News Channel, Wake Up to Money and the Today Programme), CNBC and Bloomberg. Richard’s expert commentary also appears across the national and specialist press. He previously held senior positions at Hargreaves Lansdown and NatWest Stockbrokers.