On Tuesday the Coles Group Ltd (ASX: COL) share price pushed over 2% higher to $11.96 after announcing an exclusive services agreement with Ocado Group plc.
The agreement with UK-based Ocado will bring the world's leading online grocery platform, automated single pick fulfilment technology, and home delivery solution to Australia before the end of FY 2023.
Management advised that the two parties will work together to launch an end-to-end online grocery shopping solution.
This will include a significantly enhanced customer experience which will be available to Coles' customers Australia-wide by FY 2023, two state-of-the-art automated customer fulfilment centres in metropolitan Melbourne and Sydney, and last-mile routing management technology to optimise delivery efficiency and customer service.
One broker that was pleased with the agreement was Goldman Sachs.
It believes that this agreement, combined with its recently announced supply chain automation and SAP system investment, will "go a long way to improving the competitiveness of Coles' business model through lower operating costs and, in turn, improving its competitiveness through improved value to customers."
Goldman was also pleased that Coles is sticking to the promises made at the Wesfarmers Ltd (ASX: WES) Strategy Day in June of last year. At that point it highlighted "greater use of technology and productivity initiatives will drive meaningful, long-term cost efficiencies and support future value investment."
In response to the news, the broker has adjusted its forecasts to reflect the partnership. Goldman expects Coles to benefit on the EBIT line from FY 2024 thanks largely to higher margins on online deliveries.
In light of this, the broker has upgraded its price target on the company's shares to $13.30. This price target implies potential upside of over 11% for its shares over the next 12 months. Or 16% including dividends.
Should you invest?
I agree with Goldman Sachs on Coles and feel that recent developments should make it a great long-term investment. I would choose it over Woolworths Group Ltd (ASX: WOW) for valuation reasons at this stage.
