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M&S and Ocado - placing an order for a digital delivery dream team?

Stuart Lauchlan Profile picture for user slauchlan January 27, 2019
A tie-up between M&S and Ocado might solve the former's problems in building an online grocery business.

One of the most perplexing things about tracking the digital transformation progress - or otherwise - of UK retail institution Marks & Spencer (M&S) has been the firm’s seemingly obdurate refusal to build an online grocery delivery service on the back of its food business.

But if scuttlebutt circulating at the weekend turns out to be correct, then all that might be about to change, if - if, if, if - a deal is done between M&S and online grocery market leader Ocado for the former to use the latter’s tech to create a digital delivery business at last.

Neither M&S or Ocado are commenting inevitably and if there really are talks going on, they’re almost certainly at a very early stage and with no immediate guarantee of reaching a successful conclusion. There also appear to be two sets of rumors. The first suggests a technology use deal; the second talks about M&S buying Ocado. On the second, let’s remember that investment house Hargreaves Lansdown observed last year that Ocado now has an equity value greater than that of M&S...

On the more likely idea of a tech licensing deal, there are a lot of circles to square first, but there is a logic about the idea that appeals. Signing up third party retailers to use its platform and robotized warehouses is the bedrock of Ocado’s business strategy. Its been a frustratingly slow one to deliver returns, but the past year or so has seen an uptick in activity. Currently six brands around the world use Ocado technology, including Morrison’s in the UK, Groupe Casino in France and Kroger in the US.

If Ocado’s tech were to be used by M&S, it would be delivering to a direct competitor of its original partner, Waitrose, which provides most of the produce that currently sits on Ocado’s online shelves. Ocado and Waitrose have been synonymous with one another since 2010. But the current Waitrose deal is nearing its end, due to expire in 2020, so the timing might be ripe for a change of direction for Ocado.

Waitrose now has its own online operation up-and-running and the John Lewis Partnership, which controls Waitrose, hasn’t had any financial stake in Ocado since it bailed out in 2011 for £150 million. (One of the founders of Ocado famously dubbed John Lewis to be “a complete pain in the arse” to deal with, so there’s not a lot of love lost there!).

Change of heart?

Then there is the question of whether these rumors are indicative of a Pauline conversion on behalf of M&S. It is interesting that all the reports coming out of the weekend cite the Ocado talks as being driven by M&S Chairman Sir Archie Norman, not CEO Steve Rowe. Rowe has been adamant that despite running very limited trials, the online grocery delivery model is not one that is appropriate for M&S.

His argument is that people shop in M&S in a different way to other supermarkets. His thesis is that consumers pop into M&S Food Halls or Simply Food outlets at train stations in order to buy sandwiches or that evening’s dinner, not to do the weekly shop as they do at Tesco or Morrison’s or indeed Waitrose. Earlier this month, he stated:

You’ve got to remember that we have a very different shopping mission. [Our food business] is done for today/tonight…and we are big in travel destinations, like airports and train stations. Our proposition at the moment is not appropriate for online.

It’s the “at the moment” aspect that demands scrutiny. M&S needs to do something transformational and do it fast. With a massive store closure program underway and its most recent financial results spreading gloom and doom, time is running out. A big roll of the dice is called for. As Norman noted last year:

The business is on a burning platform. Accelerated change is the only option.

My take

I would love these rumors to be true. As a consumer, I run contrary to Steve Rowe’s assessment of my spending patterns. I am that person who does do the weekly food shop in M&S. And at the same time, I do a monthly online shop with Ocado for basics, like bottled water and dog food. So a coming together of M&S and Ocado would suit me down to the ground. I suspect it would suit a lot of people.

It’s a timing gamble on the part of M&S that Rowe can’t afford to take forever. At present, I will make the journey to the M&S Food Hall because I like the quality of the product on offer and at the end of the day it’s the product that still wins out. But there’s another comment by Rowe, from 2017, that is very telling in all this:

It has not cost us anything over the last five years by not being online with food. Our customers haven’t moved yet, but they will.

They will indeed. And if M&S can’t service their desires, there’s always Amazon ramping up its own grocery delivery business to step into the opportunity gap. Tellingly, share prices in both Ocado and M&S are up today, a welcome change of direction for the latter! Time to place that order, Sir Archie.

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