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Ocado says M&S products proving popular as sales growth remains strong

There has been a higher average weighting of M&S products customers’ online baskets than Waitrose prior to the switchover

Ocado Group PLC -

Ocado Group PLC (LON:OCDO) has said its UK sales growth accelerated in the third quarter, noting that customers have “responded positively” to the switchover to the 50-50 joint venture using Marks and Spencer Group PLC (LON:MKS) products.

The FTSE 100-listed online grocery technology group said it expected to make an underlying profit (EBITDA) of “at least £40mln” for the full-year, based on current trends.

Revenue from the Ocado Retail grocery business grew 52% in the 13 weeks to August 30, 2020, following 40% growth in the second quarter and 10% in the first.

The switchover to M&S products, which took place on September 1, was said to have seen a higher average weighting of M&S products customers’ online baskets than Waitrose products had prior to the switchover.

A quick search on social media revealed not everyone is happy about the change, however.

An initial range of 4,400 food products was introduced to replace the previous 4,000 Waitrose products, with alternatives priced the same or lower, plus around 700 M&S Home & Lifestyle product lines in categories such as toiletries, baby, kitchen, dining and household.

“These are transformational times for Ocado Retail with M&S products now exclusively available online at Ocado.com,” said Melanie Smith, Ocado Retail's chief executive in the trading update. 

“The successful switchover means that M&S products are available to buy in a weekly shop side by side with branded products for the first time. As a result, we can now offer customers more choice and better value than ever before, wider ranges than any traditional retailer, and thousands of products that are only available online through Ocado.com.”

Exact figures on the post-switchover trends will not be forthcoming until the next update, though Ocado Retail said the third quarter was seeing average order size reverting back down to normal levels of around £141, which is still well above pre-crisis levels.

The number of orders per week in the quarter increased as the website was reopened to new customers and with a continued normalising of shopping patterns, which was backed up by fresh industry data from Kantar on Tuesday, showing online grocery growth continued to slow, down to 12.5% of total sales this month from a peak of 13.5%.

Ocado shares rose 6% to 2,490.86p in early trading, while M&S was up 5% to 109.45p.

“One benefit for Ocado is that the increased trading means margins are looking brighter," said analyst Sophie Lund-Yates at Hargreaves Lansdown.

“That’s because as more orders rattle through its expensive robotic warehouses, its infrastructure enjoys leverage as each extra sale doesn’t cost a lot and can drop through to profit."

She noted that this business is not the main event for Ocado but was more important for Marks & Spencer, which staked £750mln on the partnership.

With 98% of Ocado.com customers so far buying M&S products, Lund-Yates said it will be interesting to see how many of these sales will have simply transferred from stores.

  --Adds share price and broker comment--

Quick facts: Ocado Group PLC

Price: 2741 GBX

LSE:OCDO
Market: LSE
Market Cap: £20.54 billion
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