Ocado buoyed by online delivery demand and M&S switchover

By James Davey

LONDON (Reuters) - British online supermarket Ocado Group's <OCDO.L> joint venture with Marks & Spencer <MKS.L> had a 52% sales surge in its third quarter as the COVID-19 pandemic generated huge demand for online deliveries.

The Ocado Retail venture said the Sept. 1 switch from Waitrose to M&S products had gone well and Ocado Group raised its earnings forecast. Ocado shares were up 5.3% at 0934 GMT on Tuesday, extending 2020 gains to 94%. M&S shares were up 4%.

"Customers have responded very positively to the switchover," finance chief Duncan Tatton-Brown told reporters.

He said 98% of customers were already shopping for M&S products, while the new ranges had increased the average basket size by around five items and were driving strong demand for future delivery slots.

Online grocery shopping has doubled its share of the UK market to 14% since the start of the pandemic and Ocado reckons it could reach 30% over the next few years.

Ocado's capital-intensive and centralised fulfilment model meant it has not been able to dramatically increase its capacity during the crisis.

That contrasts with Britain's big four grocers - market leader Tesco <TSCO.L>, Sainsbury's <SBRY.L>, Asda <WMT.N> and Morrisons <MRW.L> - who were quickly able to adapt their predominantly store-pick model to boost capacity, enabling them to deliver faster growth and win online share in the short term.

Morrisons, for example, increased its online and home delivery order capacity fivefold over the last six months.

Ocado said it was on track to increase capacity by 40% through to 2021.

Ocado Retail's revenue was 587.3 million pounds in the 13 weeks to Aug. 30, its fiscal third quarter, versus 386.4 million a year earlier. Second quarter sales had risen 44%.

Average orders per week rose 9.6% to 345,000, while an average order size of 141 pounds was below COVID-related peaks but above pre-crisis levels.

Ocado Group forecast full year 2020 core earnings (EBITDA) of at least 40 million pounds, ahead of a pre-update consensus of 26.2 million pounds and 43.3 million pounds made in 2019.

(Reporting by James Davey, editing by Louise Heavens and Jane Merriman)