Supermarket Winners and Losers – Ocado, M&S, Waitrose, Sainsburys and ASDA

As a recent purchaser of Ocado (OCDO) shares I have received the notice of a General Meeting to approve the deal with Marks & Spencer (MKS). The agreement is the formation of a new joint venture and will effectively replace the previous partnership with Waitrose (part of John Lewis) to provide own-brand products. This looks a very positive deal for Ocado if you read the detail as the Waitrose deal was restrictive in some regards and Waitrose has also been developing its own on-live supply operations. So far as M&S are concerned, it will enable them to provide on-line ordering and delivery via Ocado when shoppers who want M&S grocery products only appear to have a “click and collect” capability at present.

The new joint venture will be 50/50 owned by M&S and Ocado with Ocado receiving over £550 million in cash which will “give the group the option to develop and grow the business carried out by Ocado Solutions”, i.e. the technology they are selling to other supermarket operators. Although it is nominally a 50/50 joint venture, Ocado will have certain tie-breaking rights which means it effectively has control and should be able to continue to consolidate the accounts of the joint venture into those of the listed parent company. It would appear that Ocado see the real growth in their business profits as coming from selling technology solutions rather than baked beans or M&S cakes.

Altogether this looks like a very positive deal for Ocado so I shall vote in favour. It also looks positive for M&S as it will avoid them having to build a completely new IT and logistics system for on-line grocery orders, but Waitrose will lose volume.

A deal that collapsed last week was that of the merger of Sainsburys and ASDA. Killed off by the Competition and Markets Authority (CMA). This is what the CMA had to say about it: “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week. Following our in-depth investigation, we have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers. We have concluded that there is no effective way of addressing our concerns, other than to block the merger.”

That’s quite damning although Sainsburys’ CEO Mike Coupe complained the CMA was wrong about higher prices. The Sainsburys’ share price has been heading downhill since mid-2015 and the shares now look relatively cheap on some valuation measures although their return on capital looks quite dire. The collapse of the ASDA deal had relatively little impact probably because it has been looking difficult to get approval on it for some time.

All supermarkets have a challenging environment with too much floorspace now that shopping habits are changing and new growing competition from low cost operators such as Aldi and Lidl. It’s difficult to see where growth is coming from if mergers are off the agenda.

This area of retailing is changing rapidly and with a resurgent Tesco the operators in the middle ground are clearly being squeezed. Ocado seem to have a good view of where they are going while Sainsburys will no doubt be doing some hard thinking.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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