If the grocery store can break free from its UK roots, a lucrative future awaits.
Tim Steiner, Ocado’s chief executive officer, praised the £750m partnership with Marks & Spencer as a win-win for both parties.
He said that M&S took an “incredibly intelligent risk” in partnering with online grocery store, and that “it’s nothing like going to the casino and putting down a bet”.
Recent tensions have fuelled speculation that M&S may move to take control of Ocado Retail.
Ocado’s potential to break free from the M&S partnership may pave the path for a profitable future.
According to its founders the company was always a technology firm built on the strength and efficiency of its robotic warehouses. Analysts say that without its retail arm the company will have to explore new worlds, including a possible US home.
Ocado Solutions, the technology division of Ocado, could benefit from a possible move across the Atlantic.
Investors have long hoped that Ocado’s tech arm would supercharge its growth, but the share price of Ocado has dropped by 66pc over the last five years.
Some market sources have suggested drastic changes in order to unlock Ocado’s full potential due to its sluggish value.
Hannah Gibson, Ocado Retail’s chief, stuck to the script in a Tuesday media call: “We are all really focused, across M&S and Ocado Group. We’re also focused on growing the business. That’s the conversation we’re focused.”
She added that “there is no new information” about the financial structure of the joint venture.
According to the agreement, M&S will report financial data for online grocery stores from next year and not Ocado Group. The first quarter saw revenues of £645.3m after sales increased by 10.6pc.
Many argue that the partnership has reached its natural end, in part because of an upcoming legal dispute caused by M&S’ outstanding payments made as part of the original deal.
M&S claimed that the joint venture had not met certain targets and therefore, a final payment should not have been made. Ocado has threatened to sue M&S for its position.
M&S is also calling for greater integration in the business and has demanded that more of their products be added to Ocado’s website to boost performance.
M&S now makes up just under 30% of Ocado Retail, the highest percentage ever.
Steiner has long argued that the joint venture is the “best outcome” both for the parties. Sources claim it showcases Ocado’s warehouse technology around the world.
But, according to some City analysts, it’s only a question of time before M&S wants more control.
Clive Black, analyst at Shore Capital, says: “I would expect that the most likely ownership structure of Ocado Retail will be M&S.”
Ocado may also look for a new investor who will buy its stake.
What happens then to Ocado’s technology arm? This division sells robot warehouse fulfillment technology to over a dozen retailers in the world.
Customers include US supermarket giant Kroger which uses Ocado’s automated robots for transporting groceries around huge warehouses.
Ocado stock is still 80pc below its peak in 2021, despite its long-standing technology ambitions. The business now only has a value of £4bn compared to £22bn at the height of the pandemic.
Ocado’s lackluster performance on the London Stock Exchange reignited the industry discussion about its future in the Square Mile.
The speculation last year about a possible takeover by Amazon quickly faded away – but was enough to send Ocado shares up over 40pc.
Brittain Ladd, a consultant and former Amazon employee who advised Kroger in its partnership with Ocado on strategy, believes that the company should be asking itself: “Why are we here?”
Ladd believes Ocado needs to look at breaking its exclusive deal with Kroger in order to grow more aggressively. It should also consider pursuing deals outside of its grocery staple, such as Target, H&M, or Gap.
He says, “I’ve encouraged Ocado to open an office in the US for years and have a US Chief Executive.”
You could also explore a US market listing, bringing in funds from American investors and retail giants for a new push.
He says that “there is no reason why someone like Ocado could not change their business model to be more aggressive in retail across the US in general.” “I strongly encourage Ocado listing in the US.
That would help Ocado unlock some capital. Ocado must articulate their strategy for how they plan to use the platform.
Other outcomes could occur. Ladd claims he advised Kroger in the past to buy Ocado directly and suggested to Ocado executives to merge with Instacart.
Ocado, according to insiders, is still fully committed to the Kroger deal, and has worked to embed its technology deeply with its customers.
Black of Shore Capital says that a listing in America is “never impossible”. He says that a few UK stocks, particularly those with a technology-oriented , have been listed in the US.
Ocado would join the growing exodus of blue chip companies from the City, as they seek better valuations and more access to cash.
Steiner, who is 54 years old, has more immediate problems than shareholders, who have complained for many years about Ocado’s valuation.
Investors have threatened to revolt at the annual general meeting, scheduled for later this month, over his salary, which, depending on share price performance, could be up to £15m.
ISS, a proxy adviser group, urged its members to vote against this deal because it was “not in accordance with UK market standards or investor expectations at the current time”.
Ocado may try to justify its deal but investors who feel aggrieved might have a valid point. The company stated in February that they do not expect to become profitable for at least five or six years.
Some investors believe that the move from London to New York would accelerate this process, but others do not.
Ladd says, “I find Ocado frustrating because they move so slowly.”