Shares of Ocado Group PLC (LSE: OCDO) dropped nearly 8% following news that Marks & Spencer might withhold performance-related payments from the online grocery delivery company.
Marks & Spencer reportedly pauses a £190.7 million payment to Ocado, citing the latter’s failure to meet performance targets last year. This decision stems from their 2019 partnership agreement.
Ocado Retail, jointly owned by both companies, operates Ocado.com and manages grocery deliveries across the UK. Despite reporting a record-breaking Christmas last month, the company’s shares have seen a 45% decline since last summer’s peak, which came after July’s half-year results revealed an unusual underlying profit.
Ahead of Thursday’s results, which will primarily focus on Ocado’s Technology Solutions and services division, analyst James Lockyer from Peel Hunt released a note. He suggested that Ocado needs to update its strategy, especially since its shares are currently lower than their pre-Covid levels. Lockyer proposed three key changes, including re-evaluating the partnership with M&S and Ocado.com.
London's primary index declined as it approached the final hour of trading on Monday, dropping 24 points to 7,682. #OCDO topped the list of the day's biggest losers, with its shares falling 6.3% after reports emerged over the weekend that its partner #MKS, was holding back… https://t.co/kKt4vjH0Tt pic.twitter.com/XKfP8cxVXu
— Share_Talk ™ (@Share_Talk) February 26, 2024
Lockyer pointed out that Ocado’s long-standing focus on consumer technology and retail, through its 24-year operation of ocado.com, has limited its growth potential. This is especially evident since the company shifted to B2B enterprise sales, partnering with international supermarket chains like Kroeger, Sobeys, and Casino.
Comparing Ocado to other digital commerce leaders who prioritize B2B, Lockyer noted that these companies have achieved stronger client wins and share price performance. For instance, Shopify’s shares have risen by 40%, in contrast to Ocado’s decline.
Lockyer believes that Ocado needs to make three significant changes: 1) Adopt standard B2B KPIs for fair investor comparisons; 2) Invest more in ‘Client Success’ to maximize the benefits of its products for clients; and 3) Change its name to dissociate its value from the perceived success or failure of any single client.
The note also highlighted that Ocado.com is expected to contribute only about 25% to Ocado Group’s EBITDA in the 2023 consensus forecasts.
