Ocado is back in deal-making mode, Sainsbury’s clears a tough hurdle, and the FTSE ignores see-saw Asian session

Ocado

“The market has been waiting a long time for Ocado to sign up new partners for its logistics technology, particularly as the pandemic has accelerated the shift for consumers to order groceries online. Ocado has now struck gold with a new deal in Spain,” says AJ Bell Investment Director Russ Mould.

“The pandemic created both tailwinds and headwinds for the group. The surge in demand for people trying to book food and drink deliveries during the pandemic was proof that they were ready to change the way they buy everyday goods.

“Most of the big retailers already have online capabilities, but few could do so on the required scale and so it meant a company like Ocado had a prime opportunity to step in and sell its robotics warehouse platform to help facilitate stronger capabilities to fulfil online orders.

“Unfortunately, the deals didn’t immediately emerge, with Ocado blaming travel restrictions on its ability to get out and sell its services.

“With travel corridors now opening again, Ocado should be in a stronger position to pick up new contracts, and certainly the market backdrop remains in its favour.

“Grocery sellers have no choice but to invest in their online fulfilment capabilities as it seems highly unlikely that consumers will all switch back to the old ways of buying food and drink.

“While Ocado’s new deal in Spain with Auchan Retail may not initially look like a big deal, there is a line in the statement which says the companies will explore the potential to expand the partnership into other geographies. Auchan operates in 13 countries including France, Portugal, Russia and Ukraine, which suggests that Ocado has got its foot in a very important door.

“A joint venture with Marks & Spencer in the UK provides a solid backbone of revenue while Ocado invests in rolling out services for other partners, and importantly investing in research and development to help give it a technological edge and lower costs in the future.

“Ocado is a multi-decade growth story and the ‘spend money to make money’ phase is going to be around for some time. Years ahead it could be generating significant income from its plethora of partnerships and that’s why the stock market seems happy to put the company on a high valuation rather than focus purely on profit. That’s fortunate because Ocado is still loss-making.”

Sainsburys

“Sainsbury’s faced an extremely hard act to follow in the past three months compared with a year ago when many people were panic buying in the early stages of the pandemic.

“This makes it all the more impressive that the company has managed to chalk up growth for the period and confirms the attractions of a UK groceries space which was recently reflected in the multi-billion-pound bid for Morrisons.

“Sainsbury’s, which has itself previously been the subject of bid interest, may again be drawing covetous glances based on its recent performance, with a slight decline for Argos as it loses the one-off benefit of people shopping for home working equipment the only real fly in the ointment.

“The pandemic has clearly helped accelerate a shift towards ordering groceries online and many people are sticking with this way of doing the weekly shop due to the convenience factor.

“Having ramped up capacity to deal with a short-term surge in demand, Sainsbury’s is now benefitting from economies of scale in this part of the business, as well as increasing the range of services to meet through its Chop Chop rapid delivery service and partnerships with Deliveroo and Uber Eats.

“The company is not resting on its laurels either, taking the fight to discounters Aldi and Lidl with a series of price cuts.

“A year into his tenure and chief executive Simon Thomas is sitting relatively pretty but the supermarkets space is an extremely competitive and demanding one so there is no room for complacency, particularly given the uncertainty over the direction Morrisons will take under its new ownership.”

Markets

“The FTSE 100 shrugged off volatility in Asian markets to trade flat on Tuesday morning, with the FTSE 250 retreating just slightly from the record highs it recently attained on reopening hopes.

“Concerns over the Chinese tech sector and its relationship with the state probably feel quite remote to an index which is dominated by a lot of traditional and old economy businesses.

“More attention might fall on the US PMI figures out later today with the markets likely to be hoping for a number which suggest steady growth rather than a blow-out reading.

“Investors are continuing to weigh both recovery and inflation and rate hike risks.”

These articles are for information purposes only and are not a personal recommendation or advice.