Main content

When relationships hit the rocks - five years on, Ocado and M&S talk legal action around "transformative" e-commerce JV

Stuart Lauchlan Profile picture for user slauchlan March 1, 2024
Summary:
Once an online dream team, M&S's unhappiness with Ocado's performance has the two on collision course.

ocado

What a difference a few years can make to a relationship. Back in 2019, Ocado and Marks & Spencer (M&S) were boasting about a bright future as the latter paid £750 million for half of the former’s retail business in the UK to create a £1.5 billion online joint venture. 

At the time, Ocado CEO Tim Steiner declared it to be a “transformative moment”

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.

Flash forward almost five years to the day and Ocado is threatening to take its partner to court. M&S made an upfront payment of £560 million and is due to pay a further £190.7 million based on certain targets being met. But it is claiming that Ocado has not hit its goals and withholding payments as a result.

The two firms now look on collision course for legal action.  Steiner insist that Ocado believes it has “a very solid case to get full payment” from M&S: 

We would much rather solve this in a nice and constructive way, which is what we're working towards doing. We are very confident that we are owed a substantial sum of money and ultimately I hope we will never get there, but we will not walk away from that sum of money."

In its full year results, Ocado has made a provision of £28 million to account for the withheld payment, although Steiner was quick to emphasis that this was a “ludicrously low” estimate of the money owed. 

The threat of legal action is not unexpected. Last year M&S Chairman Archie Norman said he was “not happy” with the performance of the joint venture and that there was “work do do”, while CEO Stuart Machin in November declared, “We’re positively dissatisfied.”

This week, an M&S spokesperson said: 

M&S remains committed to the turnaround strategy for Ocado Retail and our focus is on working with them and Ocado Group to deliver it. On the specific issue of the contractual contingency payment, our advice is that the financial performance of Ocado Retail means the criteria for the performance payment was not met.

For his part, Steiner points to lots of performance success, arguing that 90% of M&S’s food offerings are now available via ocado.com and cites “unrivaled service”: 

We are over 99% items delivered as promised. 95% on-time delivery, and a great doorstep experience. Getting the basics right in online grocery, is the most critical thing. And it's amazing how I've been in this industry now for 24 years, how few players there are in the world that can actually deliver what they promise to a customer on their doorstep on time. And it is something that our platform has always enable.

Bigger picture

Away from the conflict with M&S, Ocado Group as a whole turned in full year revenue of £2.4 billion, up from £2.2 billion year-on-year. It’s still reporting hefty pre-tax losses of £403 million, but that was an improvement of the previous year’s £500 million loss. 

Steiner flagged up an important new win, with Canadian healthcare provider McKesson, the country’s largest pharmaceutical distributor. It’s a notable success for Ocado selling its warehouse fulfilment technology in a sector outside of grocery retail, argues Steiner: 

Looking from the outside McKesson is very experienced in acquiring automation and they have acquired automation before and had a standing partner in that space, so one could imagine that the merits of our solution meant that they affected a change there to do it….Our solution has a lot of advantages in terms of its space density, it's throughput capability, the security with which it holds the inventory which as you can imagine in that field, pharmaceuticals, is very useful. You can't just kind of walk up to the machine and start trying to rifle through anything.

As I say, they're not a first-time customer in automation. They're not inexperienced an customer in automation. It's not a random win, if you see what I mean, that we should discount. It's a very smart, very sophisticated business that has dozens of warehouses across North America. It was a good win for the OIA team, leveraging on Ocado's long track record in this space not just in OIA (Ocado Intelligent Automation), but in general with the automation and running the facilities.

Not much was said however about Ocado’s partnership with US grocery chain Kroger which put development of new Ocado automated Customer Fulfilment Centers (CFCs) on hold until such time as it is confident that ones that have already been opened are meeting expectations. Kroger and Ocado opened the first US CFC in Ohio back in 2021, followed by seven others, the latest going live as recently as June this year in Maryland. According to Kroger CEO Rodney Marshall last September

We're making progress, but we wouldn't be [at] the point where we would start focusing on additional sheds until we make sure that we have a clear path on the ones we have. 

Ocado representatives this week described the relationship with Kroger as “intimate and getting more and more intimate over time”. There is an Ocado team in Cincinnati as well as a good exchange of data and learnings needed to shape growth. But there was also an admission that “we all want it to be faster”. Kroger is due to report its own earnings next week, so more information may be forthcoming then. 

My take

Steiner is a past master at the art of ‘glass half full’, a necessary skill for any CEO. So it’s hardly surprising that he insists of the M&S issue that: 

We are very confident we are owed a substantial sum of money.

Well, the £28 million provision in the accounts doesn’t exactly suggest that others share his optimism, but time will tell.

But it’s ironic that at the time of the signing of the joint venture it was assumed that M&S needed Ocado more than the other way around. After years of dismissing online grocery shopping, it bought its way into creating a large footprint in the market. 

But while Ocado has continued to bleed red ink onto its balance sheet, M&S has managed to put together a turnaround plan for itself that, while far from complete, looks promising. Meanwhile Ocado continues to invest in and innovate around back end automation and fulfilment, but still can’t turn a profit. Its latest estimate is that it won't produce a pre-tax profit for another five or six years. 

Plus ça change etc etc. 

Loading
A grey colored placeholder image