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All change as Ocado supplants M&S

The likely departure of Marks & Spencer from the FTSE 100, and its replacement by Ocado, underlines the crisis behind British retailing, as well as the changing face of the blue-chip index.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
Ocado
Source: Bloomberg

The British high street is in crisis. Much like in the US, traditional retailing has been hit hard by the rise of Amazon and others, while the UK’s problem has been compounded by falling retail sales and high taxes on commercial properties. The latest figures from the British Retail Consortium (BRC) showed that sales fell 3.1% in April compared to a year earlier, the sharpest decline since the survey was initiated in 1995. December 2008 was the last time that total sales fell overall. Despite recent weakness in inflation, real incomes remain under pressure, with the best that can be said of the most recent figures being that real pay was unchanged for the three months to April.

While the Bank of England (BoE) opted not to raise rates at its most recent meeting, its decision to lift rates back in November meant that households have become more cautious, concerned that other rate rises will follow in due course. As a result spending has been cut, as homeowners trim their budgets.

Marks & Spencer (M&S) has not been immune from this. The stalwart of the UK high street has fought hard to steady the ship over the past few years, working to improve the performance of its clothing division while the food arm continues to deliver strong performance. Recent news pointed to yet more store closures, but the bad news goes far beyond this. Pre-tax profits are expected to have fallen for a second consecutive year, while margins come under pressure and the previously strong food arm suffers a drop in market share.

For Ocado, things are quite different. The firm has been listed since 2010, and is approaching its eighth anniversary. Its debut was torrid, with the firm having slashed its initial public offering (IPO) price by 20% just hours before the final deadline, while the shares dropped on debut. From a low of 55p back in late 2011, the shares moved to a high of £6 in 2014, before dropping back to 200p. The firm was one of the most heavily-shorted by hedge funds, but these swashbuckling types have been handed a severe drubbing since November. From a low of 200p, the shares have surged to £9, with the substantial short positions undoubtedly accelerating the rise.

The firm’s success in share price terms has been due to a remarkable retelling of the investment case. At first, Ocado was supposed to remake the world of grocery delivery in the UK, an interesting, if not riveting, idea. But since 2016, the firm has striven to remake itself into a technology firm, with Amazon’s world-beating success probably its main exemplar. The deal announced last week, whereby Ocado’s technology will help one of the world’s largest grocers (US firm Kroger), confirms that it has achieved this aim.

As a result, Ocado has achieved something many thought impossible. Thanks to the rise in its share price, the firm has crossed the threshold for potential inclusion in the FTSE 100. By contrast, M&S’s fall means that it no longer meets the criteria, potentially ending its membership in the premier index, of which it has been a part since its formation in the 1980s.

The FTSE 100, long known as an index of banks, oil stocks and miners, with some UK retailers thrown in to provide variety, is undergoing a change as the economy around it evolves. While the core of heavily-weighted finance and raw materials firms remains the same (making up around 40% of the index), the arrival of Just Eat, and the potential inclusion of Ocado, underscores how traditional retailing is losing ground to the new economy of online shopping and takeaways.

It is unlikely that these firms will transform the index. The big international firms like HSBC, Shell, and Rio Tinto that make up a hefty chunk of the FTSE 100 will still be the dominant force. Despite its UK-focused elements it is still an index that is better suited to tracking the health of the global, rather than the UK, economy, but the move of a tech firm into the big league, and the departure of an iconic brand from its ranks, confirms that the FTSE 100 continues to evolve. 

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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