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Retail

Ocado's Joint Venture With M&S 'Off To A Good Start', But Challenges Remain

Ocado's joint venture with Marks & Spencer has 'got off to a good start', in the eyes of leading retail analysts, however the business still has work to do given rival retailers' significant investment in e-commerce services.

Yesterday, Ocado reported a 52% increase in revenue at its Ocado Retail arm in the third quarter, compared to 27.2% growth in the first half overall.

Perfect Timing

Commenting on its performance, Russ Mould of AJ Bell said, “The timing of the joint venture’s operations going live couldn’t have been any better. Marks & Spencer has effectively flicked the switch exactly at the point when people across the country have become reliant on ordering groceries online.

"Just imagine if it hadn’t had the deal with Ocado in place – Marks & Spencer would have looked foolish for being the one UK food seller woefully behind with its digital strategy at a time when there has been a radical shift in consumer behaviour."

Bell added that it was "important" that the joint venture got off to a strong start, as it is "effectively passing the baton to the supermarket partner so it can truly concentrate on providing grocery systems to third parties globally and finally shake off that reputation of being a van driver delivering food and drink to people’s homes.

“The joint venture is a huge deal to Marks & Spencer, but it is just a cog in the machine for Ocado as its attentions arguably lie elsewhere. It is in a sweet spot as the grocery sector around the world races to strengthen their digital capabilities and Ocado could easily pick up some big contracts in the coming year or two to supply its systems."

Online Market

Elsewhere, Thomas Brereton, senior retail analyst at GlobalData, said that Ocado's third-quarter growth was "undoubtedly impressive", adding that "all signs point to a successful switchover amid turbulent market conditions".

However, the ramping up of the wider UK online grocery market – which is forecast to grow by 79.8% this year – means that Ocado is likely set to lose online market share this year.

"Although this presently appears to be a non-issue, it displays just how quickly other supermarkets have also evolved to meet new consumer needs, and Ocado will have its work cut out to grow the proposition quite as freely as it has previously," Brereton said.

"Ocado’s greatest challenge is now how to differentiate itself from rivals – not least from ex-comrade Waitrose, which has its own designs on rapid online expansion (and whose upcoming H1 results will be carefully perused by Ocado). Trumpeting the arrival of M&S’s value-driven Remarksable range is all well and good, but, when contending against the likes of Tesco, price is not an arena Ocado can comfortably compete in.

"Instead, Ocado needs to focus on promoting more unique propositions, such as the recent addition of 700 non-food M&S product lines (which includes home and baby products), and investing in the benefits of its Smart Pass delivery scheme.''

© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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