Ocado May be a M&A Target by Tesco or Amazon

Tesco, Sainsbury’s, Asda, Morrisons, and Aldi are the largest supermarkets in the United Kingdom, and their recent financial results have demonstrated the industry’s ability to withstand inflationary pressures on food prices.

However, not all supermarkets in the UK are effectively navigating these challenging times. Ocado, an online supermarket that utilizes a highly advanced logistic and distribution platform to cater to high-end consumers, is currently facing mounting pressure, which could present an opportunity for its competitors. In February, the company reported a revenue of £2.5 billion for 2022, reflecting a mere 0.6% increase from the £2.4 billion revenue in 2021. Additionally, the company incurred pre-tax losses of £500 million in 2022.

These less-than-promising results have also raised concerns among investors, leading to a significant decline in Ocado’s share prices. The shares reached their lowest level in five years, plummeting to 395 pence from their peak of 2,800 pence during the pandemic.

Analysts are still speculating whether Ocado’s shares will continue to decline or experience a strong recovery. Nevertheless, the company’s market capitalization of £3.3 billion, a substantial decrease from over £22.5 billion in February 2021, makes it an appealing and affordable target for a merger or acquisition (M&A) by one of the other prominent UK supermarkets, or even its partner, Marks & Spencer.

Ocado’s patented technology, expanding international presence (121.9% growth to £148 million from £67 million in FY21), and a healthy balance sheet provide compelling reasons for investors to consider the company. The attractive price tag further enhances its appeal.

The critical question is whether any of the “big four” or “big five” supermarkets in the UK can acquire Ocado without raising concerns under competition law. The most recent attempted merger in the UK, between Asda and Sainsbury’s in 2019, was blocked by the Competition and Markets Authority (CMA) after an extensive year-long investigation.

However, the competitive landscape has evolved since 2019. Ocado’s smaller size compared to the big four supermarkets, its distinct business model, and its unique consumer base could potentially lead to a more favorable antitrust review compared to the Asda-Sainsbury’s case.

For instance, the CMA found that the Asda-Sainsbury’s merger would have resulted in increased prices in numerous stores, as well as higher fuel prices at petrol stations. Through a traditional analysis of store overlaps, the regulator identified over 500 areas where the merger would have reduced competition. While the regulator also expressed concerns about online deliveries, it is worth noting that the pandemic has transformed the online capabilities of all supermarkets, and numerous delivery companies have emerged during this time. Additionally, the regulator did not consider the competition from discount stores such as Aldi or Lidl substantial enough to alter its findings.

However, in 2022, Aldi became the fourth-largest supermarket in the UK, transforming the “big four” into the “big five,” and Asda rose to second place. Tesco, Asda, or Sainsbury’s have different business models compared to Ocado, as they provide in-store, online, and fuel services. Moreover, their customer bases are more price-sensitive, suggesting that they do not directly compete with Ocado. Ocado solely operates online and targets less price-sensitive shoppers, thus any acquisition by the “big five” would not result in store overlaps (a significant concern for the CMA) or raise fears of higher in-store food prices. Additionally, online prices are unlikely to increase due to the merger, as the competitive landscape would remain unchanged. Nevertheless, owing to Ocado’s advanced logistics and distribution capabilities, home deliveries and in-store pick-ups could offer tangible benefits.

If none of the “big five” supermarkets express interest, who else might view Ocado as a potential target? Perhaps the same technology company that has been expanding its presence in the UK grocery market in recent years: Amazon.

For the eCommerce giant, Ocado could serve as a suitable partner or target if it were to take a decisive step into the UK grocery market. The price tag is affordable for Amazon, and Ocado’s emphasis on technology and commitment to customer service align with Amazon’s mantra of being the “most consumer-centric company in the world.” Furthermore, the distribution synergies, from production to the last mile, could facilitate the integration process between the two companies.

However, the CMA already raised concerns in 2020 when Amazon acquired a 16% stake in a growing food delivery platform, Deliveroo. The regulator cited potential adverse effects on the online restaurant food market and online convenience grocery delivery market. Although the acquisition was eventually cleared, any move by Amazon into the UK grocery market would likely face close scrutiny from the CMA.