M&S and Ocado confirm deal to start home delivery service next year

(qlmbusinessnews.com via bbc.co.uk – – Wed, 27th Feb 2019) London, Uk – –

Marks & Spencer and Ocado have confirmed a deal which will give the High Street retailer a home delivery service for the first time.

M&S will buy a 50% share of Ocado's retail business for £750m.

The joint venture will be called Ocado and will deliver M&S products from September 2020 at the latest, when Ocado's deal with Waitrose expires.

Under the deal Ocado will also continue to supply its own-label products and big name branded goods.

M&S will fund the deal by selling £600m of shares and by cutting its dividend payout to shareholders by 40%.

“We think we've paid a fair price,” said Steve Rowe, M&S chief executive.

“It's the only way we could have gone online within an immediately scalable, profitable and sustainable business,” he said.

He added that one third of M&S business would be online in the future.

M&S shareholders were sceptical – shares fell 8% following the announcement, while Ocado rose by 8%.

Neil Wilson, chief markets analyst at Markets.com, questioned whether the value of a shop with M&S was big enough for online shopping.

“Basket sizes at M&S are extremely small relative to other larger supermarkets and significantly below the current Ocado minimum for delivery.

At the moment M&S shoppers spend an average of £13 on each shop, while Ocado average just over £100 per shop.

M&S said that part of the reason it has such a relatively low average spend was that customers could not access a wider range of products.

The company said the Ocado deal would offer their customers the ability to do a full shop online.

According to Mr Wilson, there is also a risk that shoppers will defect to Waitrose when the current arrangement with Ocado comes to an end.

“I would also query whether M&S can retain the current Ocado customer base who are used to getting Waitrose products. There is a high risk of customer leakage as consumers rotate to Waitrose's in-house delivery service,” he said.

However, Ocado founder and chief executive Tim Steiner brushed off that suggestion.

“Our customers have told us that they are looking forward to getting their M&S Percy Pig sweets', he said.

Mr Steiner told the BBC of the 50,000 products it currently sold, about 4,500 were Waitrose branded.

When the new joint venture is up and running these would be replaced by more than 4,500 M&S products, he added.

Mr Rowe claimed that current Ocado customers would benefit from the deal as Marks and Spencer products were on average cheaper than comparable Waitrose products.

The deal could also see some of Ocado's own brand products being stocked in M&S stores.

Commenting on the deal, Waitrose managing director Rob Collins said the supermarket chain had strengthened its own online business “significantly” and that it planned to double Waitrose.com within five years.


Analysis: By Dominic O'Connell, Today business presenter

The two companies' share price reactions give a succinct verdict.

M&S was down nearly 9% in early trading; Ocado up 4%. Retail experts – and professional investors – think there is a lot more in this for Ocado than for M&S.

The latter is paying £750m for a half share in a division of Ocado that last year made just over £80m of trading profit. Shareholders will have to find £600m of the purchase price from their own pockets.

The high price explains some of investor misgivings, but there are bigger questions about the fit between the two.

M&S is a (relatively) upmarket convenience store, where the average basket price is just £13.

Ocado, thanks to its tie-up with Waitrose and its wide-range of own-label products, is a full-service grocery store where most customers are doing their weekly shop, not topping up.

Will M&S be able to push enough of its products through Ocado to justify the price, and how will Ocado customers react when its relationship with Waitrose comes to an end next year?

Archie Norman, M&S's wily chairman and chief strategist, might judge these criticisms short-sighted, and typical of the City's lack of long-term vision.

Having lagged behind on online shopping for years, M&S has been catapulted into the front ranks at a stroke.

The cost of the deal, Norman might argue, should be judged against the cost of the alternatives, and the cost of doing nothing.