The Marks & Spencer (LSE: MKS) hookup with Ocado (LSE: OCDO) advanced a step on Tuesday, with the full range of M&S food available for online order. And the M&S share price fell 4%. Still, on the upside, the Ocado share price didn’t – it essentially hadn’t budged at the time of writing.
It means that Marks & Spencer has finally caught up with the other online supermarkets – Tesco, Asda, Sainsbury, Morrisons.
The full availability of M&S produce online has hit the news headlines too, but not necessarily for the right reasons. A small number of Ocado customers, it seems, have had their deliveries canceled due to demand. But what’s bad news for those few having problems is good news for shareholders. It does show there’s online demand for M&S, even if it hasn’t done much for the Marks & Spencer share price yet.
The tie-up with Ocado might have only just brought M&S up to date with the competition. But I think the timing could still turn out to be very good for the long-term fortunes of both companies. Until early this year, online grocery shopping was really only just limping along. It was growing, but really not that fast. At least, nowhere near as fast as I’d expected, considering the massive convenience.
A kick-start to online shopping
Then Covid-19 struck, and the online sellers couldn’t keep up with demand. As the lockdown took hold, shoppers booked up deliveries from all the big traders for weeks in advance. At Tesco, online business has zoomed from just 9% of total sales at the beginning of the year, to 16%. In value terms, Tesco expects its online trading to be worth around £5.5bn in 2020, from £3.3bn last year. But Tesco has fallen on the news, so it hasn’t exactly been good for the M&S share price either.
There’s one key thing I take from the online shopping boost. I don’t think this spike will be short-lived. Or that people will go back to doing it the hard way. I know people who have simply never bothered trying online deliveries before, happy enough with their old way of doing it. But they like how well it works, and they’re sticking with it.
Marks & Spencer share price good value?
People doing 16% of their shopping online is big progress. But there’s still another potential 84% to go. And the M&S/Ocado venture is in at what is essentially still the start. So what’s the future for the Marks & Spencer share price, and the Ocado share price?
Well, M&S still carries that sizeable millstone – its clothing and home business. If M&S could dump that today, what’s left would be a very viable business in my view. And I’d be able to put some sort of valuation on it. As for Ocado, there’s definitely growth potential, but at a price. There’s no profit. And the last time there was, in 2016, the shares ended the year on a P/E of around 135.
Warren Buffett famously urges us to buy wonderful companies at fair prices. I do think there is potential for these two to become wonderful companies. But not at fair prices – I see one valuation as unquantifiable, the other as way too high.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.