M&S pays Ocado £750 million for an online grocery 'ready meal'

Finally! Marks and Spencer (M&S) is fast-forwarding to online grocery delivery, as rumoured last month, teaming up with  market leader Ocado to create a £1.5 billion joint venture.

This will operate from September 2020 when the latter’s current contract with Waitrose comes to an end. M&S will pay £750 million for 50% of Ocado’s retail business in the UK.

Ocado boss Tim Steiner calls it a “transformative moment in the Uk retail sector”, arguing:

The combination of the qualities of Ocado and M&S will allow us to grow faster, add more jobs, and create more value, as we lead the channel shift to e-commerce in the UK. We are very excited by the many opportunities ahead.

The M&S move has come on relatively quickly after years of dither and delay and seeming resistance from CEO Steve Rowe. Today he says:

I have always believed that M&S Food could and should be online.

That’s more than a little different to previous comments such as this from last month:

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.

Or this from last November:

It’s not a sustainable model that we can roll out as it stands today. We’re still very interested in looking at food online …but we have no plans to scale that at this stage…and no plans to use any third party at this stage.

But flash forward a few weeks and the party line is now that a third of M&S business will be online once the joint-venture kicks in and that:

Combining the strength of our food offer with leading online and delivery capability is a compelling proposition to drive long-term growth. Our investment in a fully aligned joint-venture with Ocado accelerates our food strategy as it enables us to take our food online in an immediately profitable, scalable and sustainable way.

It’s likely that the Pauline conversion owes much to M&S Chairman Archie Norman who previously observed that “growth of home delivery in food” was a threat to the M&S operating model and called for “accelerated change” to counter this.

Why?

It’s a good move for Ocado. Divesting itself of half of its retail arm produces funds and operating capacity to focus on its role as a technology platform company. The joint-venture will also see the roll out of eight automated customer fulfilment centres over the next 12 years.

For M&S, in one bound it now has a credible online grocery operation - in theory - and a trusted partner with a proven track record. The trick now will be to upsize the typical M&S basket size. With the current Waitrose partnership, the minimum basket is £40, whereas as Rowe has previously observed, M&S shops tend to be for that night’s dinner rather than the weekly shop.

In the official announcement, M&S sets out its rationale for the joint-venture;

Our Food business is recognised for its strong focus on quality and innovation; but to evolve with the market we need to broaden our offering and to secure access to the fastest growing channel. This partnership represents a unique opportunity within our transformation programme to unlock growth within our Food business.

M&S’s prior online trial was uneconomic due to the high cost of manually picking from store, including costs associated with moving stock from DCs to stores and store replenishment costs. Developing best in class technology and investing in fulfilment centres would delay the implementation of our transformation programme and carry significant execution risk.

The joint-venture will have a lot going for it on paper;

• Ocado has a 15%^ share of the UK online grocery market and currently serves 700,000 customers.
• M&S brings 7 million members of its Sparks loyalty program and 3 million customers of M&S Bank as well as 12.3 million food customers.
• M&S also believes that its sourcing clout will bring economies of scale to the joint-venture.
• It will provide access to the entire M&S Food range. Most M&S stores only carry a section of the inventory.
• Further ahead, there are cross-sell opportunities for M&S clothing and home businesses.

My take

Well, I’m excited - which is more than M&S shareholders appear to be as their dividends are cut to part-fund this.

More alarmingly for M&S will be the cool reaction this move has won from the retail analyst community. Check this out from Neil Wilson, chief market analyst at markets.com,;

M&S’s purchase of Ocado’s UK retail business looks rather like one of its own ready meals - expensive, not very good for you, but easy, quick and ready to heat up.

Ouch!

There are certainly challenges ahead for this latest gambit and Ocado does look like the more immediate beneficiary of the deal - its share price went up! But the game’s afoot at last and not before time.