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When I was younger our weekly shopping trip was a well-practiced ballet beginning in one of the big four supermarkets and ending in M&S for a Percy Pig or two.

And whether you tend to do the same or just pop in for lunch, the grocer’s average basket value of £13 (down from £20 last year) suggests few of us see it as our one-stop shop. That’s a problem for a retailer battling a virus-induced drop in footfall and no real online presence to compete with the big names in the UK.

That’s why investors have been eager to see what this month’s tie-up with British online supermarket and tech group Ocado can do for the chain.

The joint venture Ocado Retail previously shared with Waitrose reported a 52% rise in revenue in the quarter to the end of August. And now that the 18-year partnership has ended, M&S looks set to pick up where Waitrose left off - Ocado reported initial signs of shoppers happily filling their online baskets with more M&S products on average than Waitrose ones prior to the switchover.

For Ocado, the venture comes at a time when online shopping has been all but essential in some cases. 30,000 more online orders than this time last year and an average basket size normalising to £141 from Covid peaks will be welcome news to investors, as will the £40 million in full year earnings forecast by the group this morning.

Today’s update is yet more evidence of previously novel or aspirational technology surging in utility during the pandemic. Ocado has been on the watchlists of investors for years now, with the value in their back-end tech the main draw for most.

Legacy firms with little to no distribution networks and, ultimately no plan B, were caught out during lockdown which saw Ocado shed that novelty in many market-watchers’ eyes - the crisis has revealed just how valuable the firm is. Shares are up over 75% in a year and over 640% over five years. Please remember past performance is not a reliable indicator of future returns.

Past meets the future

The partnership between the new kid on the block and the traditional face of British retailing show just how important it is to keep innovating - as M&S have found, sooner or later the old ways start to show their age.

Scratch the surface of Ocado’s business model and you’ll find all the characteristics of a tech company that just happens to be involved in getting the weekly shop to your door. Their customer fulfilment centres incorporate gaming technology to visualise warehouses in 3D, allowing analysts to spot problems like traffic jams before they happen, and their work in robotic order fulfilment is a sight to behold - have a look online.

Without any superstores to take care of, the company has been able to leapfrog issues like underperforming sites and skip straight to a nimble online offering.

A key element to all of this is that the software powering the whole operation is written in-house. This is where Ocado sees the opportunity.

Grocer growth

It’s one thing for traditional retailers to have a fleet of home delivery vans backing up orders on a website but when it comes to delving into smart warehouses using machine learning and artificial intelligence they may need to go shopping themselves. This is where M&S finds itself today, having neglected its own delivery capabilities - but it isn’t alone.

A significant number of online retailers still do not have adequate online portals and Ocado hopes it will be quicker and easier for supermarkets to buy their technology and warehouse expertise rather than try to develop it themselves.

And even if the more established players downed tools and looked at creating such a system, it’s unlikely they would catch Ocado, which opened its latest customer fulfilment centre in 2018, designed to be the largest automated warehouse for online grocery retail in the world.

With the tech roll-out firmly at the forefront of the company’s intentions, it’s unlikely this is the last we’ll hear of deals with big retailers. And the ones who already incorporate Ocado’s technology might just have to deal with it, or invent their own.

More on Ocado

Five year performance

(%) As at 14 Sept

2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Ocado -18.7 16.1 206.7 47.6 74.4

Past performance is not a reliable indicator of future returns

Source: FE, total returns as at 14.9.20, in GBP terms

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered

UK, Shares

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