Online grocer Ocado is vying with supermarket giant Tesco to be the UK's most valuable retailer

• Online grocer Ocado's stock market value has risen to £21.66 billion ($27.8 billion) – briefly making it the UK's most valuable retailer, ahead of Britain's biggest grocery chain, Tesco.
• Ocado only has a 1.7% share of the grocery market, according to Kantar, but saw sales jump 52% in the quarter to August.
• But it is uncertain how long this boom in grocery delivery will last after overall UK online food sales fell nearly 5% between July and August.

Grocery e-commerce service Ocado accounts for just a fraction of every pound spent on shopping in Britain, but is vying with supermarket group Tesco for the position of the country's most valuable retailer, having briefly overtaken its larger rival on Thursday.

Tesco has nearly 4,000 stores in the UK alone and accounts for nearly a third of all spending in the domestic grocery market, making it Britain's biggest retailer, according to analyst firm Kantar.

Tesco is worth £21.06 billion ($27 billion), while Ocado, which has no physical stores and just 1.7% in market share, briefly reached as much as £21.80 billion ($28 billion) on Thursday.

Ocado is now worth twice the combined value of Sainbury's and Morrisons – Britain's second and fourth biggest supermarket chains - and has seen its share price double over the course of this year, thanks in large part to a surge in the number of people opting for online grocery deliveries since the outbreak of the coronavirus pandemic earlier this year.

The company is the top performer in London's FTSE 100, with a 108% gain in the year to date, compared with a 23% loss in the broader index and an 11% decline in shares of Tesco itself.

Tesco is in the middle of a change in management this week. CEO Dave Lewis stepped down after six years and, from Thursday, will be replaced by Ken Murphy.

Ocado's boom during the pandemic

Ocado reported a 52% sales jump in the quarter to August, with an average of 345,000 weekly sales.

But Tesco is hot on Ocado's heels. The group said in August it is hiring for 16,000 new jobs to facilitate online orders because of "exceptional growth" in sales.

On September 1, Ocado switched the range of products it offers to M&S, from Waitrose, both upmarket grocery chains. It reported that customers had responded "positively" to the change, and said shoppers were adding more items to their orders.

But the partnership didn't have the smoothest start, after customers complained about order cancellations. But the launch day was biggest ever for forward deliveries, Ocado said. Under the agreement, Ocado can also sell around 700 product lines from M&S's home and lifestyle ranges.

Ocado also sells technical solutions to other grocers through its Ocado Solutions arm. The service gives retailers access to the company's warehouse operation solutions and software. The first distribution center through the partnership opened in March in France, despite COVID-19-related disruption. Ocado Solutions now has partnerships with Kroger in the US, Sobeys in Canada, Morrisons in the UK, ICA in Sweden, Group Casino in France, and Bon Preu in Spain.

Falling online grocery orders

But it is uncertain how long this boom in online deliveries will last. UK online food sales were nearly 5% down in August compared to July as customers returned to supermarkets — but British shoppers are still spending nearly twice as much on grocery deliveries than last year, according to recent data from the Office for National Statistics.

Total food sales across both online and physical stores fell by around 2% from July to August. Britain's "Eat Out to Help Out" scheme – which saw diners eat more than 100 million meals out in August as part of a government-subsidized scheme to boost the hospitality industry – caused supermarket sales to plummet by £155 million ($201 million) in August, research by Kantar shows.

Not only are online sales falling – British supermarkets are also under strain as some shoppers have started panic buying after Boris Johnson announced new lockdown measures. Last week, supermarkets including Tesco, Sainbury's, and Morrisons reintroduced product limits on items like tinned food, toilet paper and hand sanitizer. One Morrisons employee told Business Insider their store was "worse than a bad Christmas."

But for now, Ocado doesn't expect a slowdown in online orders to significantly affect its bottom line. Earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2020 should reach "at least" £40 million, Ocado said. Last year it recorded EBITDA of £43.3 million – a 27% fall from 2018.