As Ocado ties up with M&S, what next for Waitrose as the online grocery market heads into a new era?

Profile picture for user slauchlan By Stuart Lauchlan March 11, 2020
Summary:
Ocado and M&S are preparing for their new venture later this year, just as Waitrose parent, The John Lewis Partnership, concludes a major strategic review of the business.

ocado
(Ocado, M&S, Waitrose)

In September this year, there will be a tectonic shift in the UK online grocery sector as Ocado breaks off its long-term relationship with Waitrose and formally kicks off its new £750 million joint venture with Marks & Spencer (M&S).

It’s a shift of allegiance that’s enabling M&S, not before time, to shake off its long-held antipathy to the online grocery business. It will also see Waitrose refocus its own online efforts into its Waitrose.com offering just as parent company The John Lewis Partnership nears the end of a recently announced strategic review of its operating strategy in a volatile omni-channel retail market that has put pressure on its John Lewis brand.

From the point of view of Ocado CEO Tim Steiner, the tie-up with M&S makes perfect sense. As he noted last month:

M&S are going to bring food innovation and sourcing at scale. Obviously, in own-label food, their sourcing power is double that of Waitrose. We’ll also for the first time, get to see what these customers are doing in-store as well as online through integrated CRM. We at Ocado Group will bring the leading fulfillment operations with continuous technology upgrades as well as new profitable immediacy and same-day models to the mix. And Ocado Retail will develop their commercial and marketing abilities and expect to significantly strengthen their offering. All of this will create new opportunities, more data and insights to act on at an unparalleled offer.

So we expect to swap out the 4,500 Waitrose lines, replacing them with more than 4,500 M&S lines that our consumer research tells us that customers understand is a better-quality product, and our data is suggesting is at cheaper prices today. And we're going to enable more missions to be served, which means that we expect that business going forwards to grow faster, to grow faster both in the current geographies and existing missions, also to grow by entering new geographies and by offering customers new, and serving new missions.

M&S currently is driving its pricing down, I think, quite noticeably in the market, to be more price competitive. Waitrose has been driving its pricing up to maintain, in our opinion, to maintain profitability of the supermarkets to make up for holes elsewhere in the group. So the switchover will, in itself, be a reduction in pricing to the consumer. Because right now, M&S Food is cheaper than Waitrose Food.

What next? 

So, win/win from the Ocado/M&S camp. But what about the ‘one they leave behind’? What happens to Waitrose? According to recently appointed John Lewis Partnership CEO Sharon White, the moment has been prepared for - or is being prepared for at least:

This year we invested in Waitrose.com, ahead of the ending of the relationship with Ocado and in John Lewis Online…We've talked in the past about Waitrose.com having the potential to be a billion pound business and I'm pretty bullish. I think it's going to be fascinating over the coming months. We are working at full pelt and I think we are really confident about our plans developing Waitrose.com's new fulfilment Centre in Enfield. We’re doing the huge amount of work getting our shops ready. I think we've got a great competitive proposition. And [online] is an area that's growing very rapidly for us, 13% last year. I think some of the early numbers we've seen, so far this year, we're not we're not much off 20% growth. So I think this is a very, very important new area of the business. We're investing. We're very invested very significantly behind it.

What will change most perhaps is a shift from the Ocado model of automated warehouse distribution centers, to a hybrid model of fulfilment which will involve both the new center referenced by White, but also in-store order picking. According to Patrick Lewis, Executive Director of Finance, the latter aspect is of particular interest:

It's been the Holy Grail of the industry.  I would simply say at the stage we are at at the moment we're very confident. The mixture of supply chain model we've got for us is right. [It] has a significant element of store picking across the country. but for London where space is tighter and volumes are heavier within a shop, we support it with with warehouse picking. I am sure that in in the years to come  that will develop further. But one of the trends in food is people purchasing a little amount more often, so there is enormous value that we have in our shop estate. And we're determined to make the most of it.

He adds that the firm has added 24 extra Waitrose stores that will be doing picking alongside the new center:

We are very much set up as an omni-channel retailer. We firmly believe our shops are fundamental to the success of our online business, and that we see the business as one. But as we look at our asset values in our shops, we do every six months review and make really sure that the asset value In the shop is truly earning [its] keep, the sales that are coming in. What we've reflected over the last year is the fact that online sales have continued to grow as a proportion. And therefore we have attributed a lower proportion of online sales to those shop assets as we've done our impairment calculation...it's really reflecting a change that we've been seeing on the high street.  We still believe that the majority of our shop assets are fundamental to our overall omni-channel business going forward.

Review

That said, the future shape of the store side of the omni-channel mix will be one element of the wider strategic review, says White:

We have 50 stores. We don't have 500, we don't have 1000 stores...we start here in a better place than many of our competitors. It's very much that we want to make this a wide ranging consideration. So very much it is about, are we in the right locations? Do we have the right format? I think we're really interested in looking at different formats, you know, maybe getting back on the high street at a smaller scale than in the past.

We've got places in the country where you can see a classic Waitrose in the basement and John Lewis on the upper floor, Waitrose driving footfall given its broader customer offering. So, we are very lucky to have the two brands to think about together in that way. In some cases, we'll be looking at repurposing or resizing stores and we've done that to some degree already.

Store closures will be part of the consideration inevitably, but White reiterates the idea that in-store picking can be positioned as competitive differentiator that will appeal to the Waitrose customer demographic. She cites the use of plastic bags as a case in point:

It might sound like a really small point, but it is incredibly important - If you want your great food delivered without lots and lots of plastic bags affecting the environment, you can only get that through a store pick model. Automation doesn't allow you to have that choice for the customer. I think we just have to sort of think about the decision making between sticking with Ocado and moving across to Waitrose, [not only] the commercials, but also what's the psychology for the customer?

Whatever emerges from the overall John Lewis Partnership strategic review, it’s clear that 2020 will be a transformative one for the retailer - and that’s before the long term impact of Coronavirus can be factored in. White says:

I think what's interesting if you look at the very recent numbers on on Waitrose, we have definitely seen quite a marked uptick in demand on Waitrose, ahead of the market. It may be too early to judge, but there is a sense in which, during difficult, challenging times, there is a rush to trusted brands. The fact that we are an omni-channel business, and increasingly so on Waitrose's side, does provide some additional purchasing as we head into a pretty, pretty volatile year.

My take

I have to confess at this stage that, as an Ocado user, my allegiance will shift more than happily with the platform across to M&S come September. Unless that, for some reason, proves to be a poorly executed transition - which seems unlikely - I can’t imagine Waitrose.com playing a part in my future retail choices. That said, I know someone who’s mortified at the thought of Ocado no longer delivering Waitrose goods, so there will clearly be a shifting and resettling of the customer demographic as the changes separate the fan bases of the respective retailers. Whatever occurs, the latter half of the year will see the online grocery sector in the UK become a much livelier place - and that’s before Amazon ups its ante…