Ocado’s share price up 4% after strategic partnership with Coles supermarkets

Ocado saw its share price climb 4% after it confirmed a strategic partnership with Australian supermarket company Coles.

This latest deal comes just weeks after Ocado opted to sell 50% of its UK retail business to British supermarket Marks & Spencer (M&S), with its recent string of tie-ups offering an insight into the new direction the company is heading.

Technology at the heart of Ocado's future

In a recent report, Hargreaves Lansdowne posed the question: ‘what exactly does Ocado do if it’s not scurrying around delivering upmarket groceries?’

The answer: stop worrying about selling upmarket groceries and, instead, focus on providing a sophisticated technology platform to help retailers increase their online sales.

‘[Ocado’s] cutting edge systems fulfil tens of thousands of orders every day, largely without human intervention,’ George Salmon, Equity analyst at Hargreaves Lansdowne said.

‘And those whirring systems are a product themselves, with other retailers paying license fees to make use of them.’

Ocado’s latest deal with Coles is one of several strategic partnerships that the company has made to help limit its exposure to food retail and instead serving its online sales platform to retailers for a fee, which over the long run could see it margins outperform the supermarkets it works with.

‘Tesco manages an operating margin of around 3% on its £60bn-ish of sales,’ Salmon added. ‘Ocado might not be able to match it on the top-line, but its shift to lucrative technology business means margins should outshine Tesco's in time.’

More deals ahead if Ocado is to secure its future

With Ocado signing several major partnerships with the likes of Kroger – the second largest food retailer in the US – as well as deals with M&S and Coles, the company’s transformation from a UK-based food retailer to international technology platform provider is well under way.

But there is still a lot of work to be done, with the company more than capable of funding the investments it needs to complete its transformation after securing more than £750 million in cash from the sale of its UK retail business to M&S.