M&S bets big on Ocado tie up

Marks & Spencer and Ocado have confirmed a deal which will give the former a food delivery service for the first time.
6 March 2019 | 1531 Shares

One of the Ocado delivery fleet. Source: Shutterstock

M&S CEO Steve Rowe has been pursuing a ‘digital first’ strategy as he looks to turn around the struggling retailer’s fortunes.

With over 30 store closures in the last few months and a slowdown in openings of its Simply Food stores across the UK, online innovation has moved to the top of the agenda, leading to the acquisition of a 50% share of Ocado’s UK retail business for £750 million.

It will fund the deal, which gives it access to the highly-touted Ocado Smart Platform (OSP) technology, by selling £600 million of shares and by cutting its dividend payout to shareholders by 40%. The joint venture will be called Ocado and will deliver M&S products from September 2020 at the latest, when the former’s deal with Waitrose expires.

Mixed reviews

The announcement has received a mixed response from industry observers. It could be a case of too little, too late, according to Thomas Brereton, Retail Analyst at GlobalData. This attempt to rapidly gain momentum in the online market may be a misstep with short-term gains potentially outweighed by a long-term deterioration of brand awareness, he believes.

Is it wise to pay £750 million for a 50 percent stake in a business which only made EBITDA of £34.2 million during the previous year? Will it alienate Ocado shoppers when Waitrose products are replaced by M&S equivalents? Will the investment encourage M&S customers to spend more on groceries with the retailer? How many packs of Percy Pigs would you need to buy to qualify for home delivery? So many questions, no answers at this early stage.

Putting a more positive spin on the deal is Catherine Shuttleworth, CEO at Savvy. She feels that it makes sense, saves time and money. M&S is out of the trap quickly and has a whole new massive group of digital savvy shoppers to go for, with positive attitudes to home delivery and a relatively high grocery spend.

What took you so long?

It was back in 2008 when the then Commercial Food Director of M&S said that the retailer was considering adopting a model like e-commerce darling Ocado. In the intervening 11-year period, the food space has completely transformed. M&S has seen off three chairmen and three chief execs, but still hasn’t delivered on the e-commerce front.

Whilst sometimes there is real merit in zigging whilst others zag, Archie Norman and his new experienced team in food – lead by Stuart Machin and soon to be joined by Tesco star George Wright – know that they need a radical solution to capture the hearts, minds, and stomachs of younger shoppers.

As for Tim Steiner and his Ocado team, they can crack on with selling their tech solutions to retailers across the globe without being held back and distracted by the day-to-day running of the Ocado UK retail trading business. They can also cut ties with Waitrose, a partner that they have never really fallen in love with. Their differences of opinion have been many and public over the last few years.

But will it be enough to create a lever of growth for M&S? That remains to be seen but one thing is certain: with Amazon on the prowl, doing nothing isn’t an option, Shuttleworth argues.

Amazon Prime is fast becoming a ‘meal for tonight’ delivery service, but it still hasn’t cracked a fresh grocery delivery supply chain that UK consumers can trust.

Now that it has fired a shot across the e-commerce giant’s bow, M&S must deliver a balance of an efficient and functional online experience together with the premium and personalized experience consumers expect from its stores.

If it gets this wrong, the consequences could be catastrophic for a business that, like many other UK High Street stalwarts, has struggled to keep pace with rapidly changing omnichannel times.