Ocado vs M&S share prices: diverging fortunes in UK retail

The rise and fall of Ocado's share price

Thursday’s third quarter (Q3) trading statement might shed further light on how Ocado, the online grocery retailer and technology company, is progressing. The past five years have been a rollercoaster ride for the company and its share price. Once hailed as a Covid-19 pandemic winner, Ocado's share price has plummeted by around 75% over this period. This dramatic decline reflects the company's struggles to adapt to the rapidly changing retail environment post-Covid-19.

Ocado initially benefited from the surge in online shopping during lockdowns. However, as restrictions eased and consumers returned to in-store shopping more quickly than anticipated, the company's business model showed signs of strain. Ocado's focus on innovative e-commerce technology and automated fulfilment centres proved less flexible than traditional retailers in adapting to this shift in consumer behaviour.

One of the key challenges facing Ocado has been the slower-than-expected adoption of its expensive e-commerce technology by other retailers. The company's plans for international expansion were also hampered by pandemic-related travel restrictions, further slowing its growth. These factors have contributed to investor skepticism about Ocado's long-term prospects.

Financial performance has been a persistent concern for Ocado. In its 2023-year history, the company has only achieved pre-tax profit in three years. The high capital requirements for continued technology investment have put pressure on the company's finances, leading to questions about the viability of its business model in the current retail climate.

Technical analysis on the Ocado share price

Ocado’s share price, down nearly 55% year-to-date (YTD) and still sliding, is seen trying to at least short-term stabilise above last week’s 315.10 pence (p) low. This low is around 12% above the Ocado share price June near seven year low at 278.20p.

Ocado daily candlestick chart

For the Ocado share price to rise again, it would first of all have to break out of its August-to-September downtrend channel and then rise above its 457.80p July peak. Only then could the share price begin to stabilise in the medium-term.

As long as the Ocado share price remains below its 457.80p July peak, the long-term downtrend remains intact. A fall through its June 278.20p low would engage the November 2017 trough at 235.80p.

Ocado monthly candlestick chart

Marks & Spencer's impressive turnaround

In stark contrast to Ocado's struggles, Marks & Spencer (M&S) has experienced a remarkable resurgence. The company's share price has soared by over 80% over the past five years, with an impressive 106% rise in 2023 alone. This dramatic turnaround reflects M&S's successful navigation of the post-pandemic retail landscape.

M&S's profits jumped to a six-year high in 2023, with pre-tax profits up 56% to £476 million. This strong performance was driven by growth across both food and clothing divisions, demonstrating the effectiveness of the company's comprehensive turnaround strategy.

Key to M&S's success has been its ability to improve its product offering. The company has revamped its clothing lines to appeal to a broader demographic while enhancing the quality and value proposition of its food offerings. This product-focused approach has resonated well with consumers, driving sales growth and customer loyalty.

M&S has also made significant strides in its digital transformation, investing heavily in online capabilities and digital infrastructure. The company's partnership with Ocado for online grocery delivery has proven particularly successful, allowing M&S to benefit from e-commerce growth without bearing the full burden of technology investment.

Technical analysis on the Marks & Spencer share price

The Marks & Spencer share price, up 30% YTD, remains on an upward trajectory and has its May 2017 peak at 380.50 p in its sights. Slightly further up lies the 61.80% Fibonacci retracement of the 2015-to-2020 bear market at 383.20p.

The medium-term bullish trend will remain valid as long as the early August low at 299.50p underpins.

Marks & Spencer monthly candlestick chart

Factors behind Ocado's struggles

Ocado's challenges stem from several factors that have impacted its business model and growth prospects. The company's centralised, automated fulfilment centres, while highly efficient, lacked the flexibility to scale up quickly compared to competitors who could rapidly adapt existing stores for online order fulfilment.

The slower-than-expected adoption of Ocado's e-commerce technology by other retailers has also been a significant setback. The company's business model relies heavily on licensing its technology to other supermarkets, both in the UK and internationally. However, the high costs associated with implementing Ocado's systems have deterred some potential partners.

Ocado's international expansion plans, a key pillar of its growth strategy, were significantly disrupted by the pandemic. Travel restrictions and economic uncertainty led to delays in setting up new partnerships and fulfilment centres in overseas markets, slowing the company's global growth ambitions.

Market perception of Ocado has shifted from viewing it as a high-growth tech stock during the pandemic to a more cautious outlook in the face of these challenges. This change in investor sentiment has contributed to the significant decline in Ocado's share price.

Keys to Marks & Spencer's success

M&S's impressive turnaround can be attributed to a well-executed strategy implemented by the company's leadership, including CEO Stuart Machin and co-CEO Katie Bickerstaffe. This strategy has focused on several key areas that have driven the company's resurgence.

Effective cost management has been crucial to M&S's success. The company implemented a series of store closures and restructuring measures, achieving £300 million in cost savings over three years. This streamlining has improved profitability and allowed for reinvestment in growth areas.

M&S has also successfully repositioned its brand to attract younger customers while retaining its core audience. This delicate balance has paid off in terms of customer loyalty and sales growth. The company has complemented this with a strategic approach to its store network, closing underperforming locations and opening new, more efficient store formats.

The company's leadership has demonstrated resilience in challenging times, effectively navigating inflationary pressures and changing consumer behaviours. This adaptability has not gone unnoticed by investors, with M&S's share price reflecting growing confidence in the company's strategy and execution.

Lessons from the Ocado and M&S story

The contrasting fortunes of Ocado and Marks & Spencer offer valuable lessons for investors and retail industry observers. Their divergent paths highlight the importance of adaptability and balanced strategies in the ever-evolving retail sector.

Ocado's specialised focus on e-commerce technology, while innovative, has faced challenges in the post-pandemic environment. The company's experience underscores the risks associated with a narrow focus in a rapidly changing industry. Investors considering trading shares in technology-focused retail companies should carefully assess the flexibility and adaptability of their business models.

M&S's comprehensive approach, combining traditional retail strengths with digital innovation, has allowed it to capitalise on both in-store and online shopping trends. This balanced strategy has proven more resilient to market shifts and changing consumer preferences. Retail investors may find valuable insights in M&S's ability to modernize its offerings while maintaining its core brand identity.

Both companies' experiences highlight the importance of financial stability in the retail sector. M&S's focus on profitability and cost management has bolstered investor confidence, while Ocado's struggles to achieve consistent profitability have weighed on its stock price.

Ocado versus M&S growth chart

Future outlook for Ocado and M&S

As the retail landscape continues to evolve, both Ocado and Marks & Spencer face ongoing challenges and opportunities. For Ocado, the key will be in demonstrating the long-term value of its technology and achieving consistent profitability. The company may need to consider diversifying its revenue streams or adapting its business model to reduce reliance on high-cost fulfilment centres.

Ocado's future success could hinge on its ability to secure new partnerships and accelerate the adoption of its technology by other retailers. Investors will be watching closely for signs of progress in this area, as it could significantly impact the company's stock performance.

For M&S, the challenge lies in maintaining its momentum and continuing to adapt to changing consumer preferences. The company will need to balance its successful turnaround strategy with ongoing innovation to stay ahead in the competitive retail market. M&S's ability to continue growing its online presence while optimising its physical store network will be crucial for sustained success.

Both companies' futures will be influenced by broader trends in the retail sector, including the continued growth of e-commerce, changing consumer behaviours, and economic factors such as inflation and consumer spending power. Investors considering trading in the retail sector should closely monitor these trends and their potential impact on company performance.

The contrasting paths of Ocado and Marks & Spencer serve as a valuable case study in the importance of strategic agility and balanced growth in the modern retail environment. As the sector continues to evolve, companies that can effectively blend traditional retail strengths with technological innovation are likely to be best positioned for success.

Analysts recommendations for Ocado and Marks & Spencer

According to London Stock Exchange Group (LSEG) Data & Analytics fundamental analysts are rating Ocado as a hold with 3 strong buy, 1 buy, 5 hold, 4 sell and 1 strong sell. Their median price target is at 623.58p, roughly 85% above the company’s current share price (as of 16 September 2024).

Marks & Spencer, on the other hand, are rated as a ‘buy’ with 5 strong buy, 10 buy and 2 hold - with the mean of estimates suggesting a long-term price target of 360.07 pence for the share, at the share’s current price (as of 16 September 2024).

Importance of thorough research

For investors interested in the retail sector, the diverging fortunes between Ocado and Marks & Spencer highlight the importance of thorough research and careful consideration of company strategies. Whether you're looking to buy shares or explore other investment opportunities, understanding the factors driving company performance in this dynamic industry is crucial.

To gain hands-on experience with trading retail stocks without risking real capital, consider opening a demo account with a reputable broker. This can provide valuable insights into market dynamics and help you develop your trading strategies in a risk-free environment.