M&S and Ocado growth slows but Tesco and Sainsbury edge higher

Grocery price inflation eased to 4.0% in January (down from 4.3% in December), while take-home sales were 3.8% higher year‑on‑year in the four weeks to 25 January as shoppers shifted toward own‑label (a record 52.2% of spend) and promotional buying (promotions up 10.9%). Over the 12 weeks to 25 January Ocado Retail led growth with sales up 14.1% and a 2.1% market share, Tesco grew 4.4% and reached a 28.7% market share (highest since March 2015), Sainsbury’s grew 5.3% with a 16.2% share, M&S grocery eased to 6.9%, Lidl maintained double‑digit growth and 7.7% share, while Aldi, Morrisons and Asda recorded more modest gains/steady shares. The data signal continued demand resilience but margin pressure and value-seeking behaviour for grocers, with market-share gains concentrated among the largest and discounter chains.

Analysis

Market structure: Winners are Tesco (TSCO.L) and Sainsbury (SBRY.L) for scale-driven pricing power (Tesco 28.7% share, Sainsbury 16.2%), online specialist Ocado (OCDO.L) and discounter Lidl for share gains (Ocado +14.1% 12w, Lidl >10% growth). Losers are mid‑market and margin‑squeezed operators (Morrisons MRW.L lagging at +2.5%) and branded CPM suppliers as own‑label hit a record 52.2% share; heavy promotions (+10.9% YoY) compress gross margins.

Risk assessment: Short‑term (days–weeks) risk is sentiment/earnings volatility driven by monthly CPI prints—grocery inflation easing to 4.0% helps volumes but pushes promotions. Medium term (months) margin compression if promotional intensity persists; long term (quarters/years) structural share shifts toward online and discounters could permanently reduce pricing power for mid‑tier players. Tail risks: sudden energy/commodity shock pushing grocery inflation >6% or regulatory action on Ocado/M&S JV would reprice winners quickly. Hidden dependency: Ocado’s growth depends on tech/logistics profitability and M&S cross‑sell, not just top‑line.

Trade implications: Overweight large-scale, cash‑generative grocers (TSCO.L, SBRY.L) while using hedged exposure to Ocado’s online premium. Prefer selective short/put exposure to MRW.L and branded CPGs exposed to private‑label substitution. Cross‑asset: continued CPI easing supports long Gilts bias and GBP strength modestly; a reversal would widen credit spreads for retail landlords.

Contrarian angle: Consensus underestimates permanent private‑label share gains — branded suppliers (e.g., large CPGs) are vulnerable to multi‑year margin erosion. Ocado’s market share gains may be underpriced relative to e‑commerce TAM but execution/cash burn risk is real; consider asymmetric, capped‑downside option structures rather than naked longs.

Key Decisions for Investors

• Establish a 3–4% long position in Tesco (TSCO.L) via shares, target +15% upside over 6–12 months if market share ≥28.5% and H1 gross margin stabilises; set a hard stop at -8% and trim half if grocery inflation spikes >0.5 percentage points month‑over‑month.
• Buy 2–3% position in Sainsbury (SBRY.L) and sell 3‑month OTM covered calls (5–7% OTM) to harvest elevated promotional-driven volume while collecting premium; exit/roll if 12‑week growth falls below 3% or market share drops >0.3ppt.
• Take a tactical 1–2% bullish call spread on Ocado (OCDO.L) (buy 3‑month ATM calls, sell 3‑month 25% OTM calls) to capture continued online share gains while capping downside; unwind if 12‑week growth falls <10% or company issues negative cash‑flow guidance.
• Initiate a 1–2% short or buy 3–6 month put spread on Morrisons (MRW.L) sized to portfolio beta, target >10% downside if 12‑week growth remains ≤3% and share falls below 8.0%; cover if quarterly sales rebound above 5% or market share stabilises.
• Monitor two triggers closely for portfolio rebalancing: (A) grocery inflation moves ±0.5ppt month‑over‑month (flip bias toward bonds/defensives if it rises), and (B) promotional spend decelerates >3ppt YoY (reduce short exposure to branded CPGs and lift unhedged Ocado exposure).