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“Accelerated change”: what would an Ocado-M&S deal mean?


Ocado saw its share price rise on news over the weekend that it might sign a new deal with Marks & Spencer.
Details in the Mail on Sunday report were vague at this stage but suggested that Ocado could effectively replace its range of Waitrose products with M&S ones. It also mentioned M&S potentially buying distribution centres, delivery vans and lorries from Ocado.

The existing Waitrose-Ocado agreement runs until 2020, allowing Ocado to sell Waitrose products and use its branding. However, Waitrose also has its own delivery operation.

From M&S’s perspective, it is keen to achieve the “accelerated change” expressed in chairman Archie Norman’s statement in its 2018 annual report. He named the growth of home delivery in food, at about 1% of the market a year by 2022, as a threat that was eroding the retailer’s business and market position.

“The inadequacy of our logistics means we are unable to fulfil our delivery promises to customers at peak times,” the report added later.

Russ Mould, investment director at AJ Bell, tells eDelivery that M&S has been facing problems as “a company with a long heritage constantly trying to adapt to new requirements.” It has experienced IT problems and issues with stock availability.

Mould adds that with a large amount of legacy equipment, M&S doesn’t have the option to “throw everything out and start again.”

We look at some of the potential, not necessarily mutually exclusive, outcomes of a deal between M&S and Ocado.

Ocado becomes a supplier of M&S

One potential outcome is that Marks & Spencer becomes another customer of Ocado, with the existing relationship with Waitrose not necessarily changing.

Several major retailers have taken this route, including Casino in France and Kroeger in the US. Casino uses Ocado’s customer fulfilment centres, its last-mile routing technology and mobile grocery ordering applications.

Ocado Smart Platform is a combined hardware and software platform for fulfilling orders; within warehouses it includes a dense cellular network and a robotics grid for picking and packing.

How involved Ocado would be is unclear. It could simply sell M&S the technology or it could come on as a partner, either in a consulting function or actually running the warehouses.

A certain beneficiary of such a deal, says Mould, would be Ocado – or more specifically, its share price. He says that the company’s share price has increased dramatically as its technology business has attracted more customers, and that this side of the business constitutes the bulk of its valuation.

“The more deals they sign the more people will be convinced,” he says.

M&S becomes a supplier of Ocado

Ocado could begin selling M&S products in the same way it currently offers Waitrose ones. Working with Ocado would provide the company with a quick route to market without it having to build its own

“It would potentially solve a technological and growth problem for M&S relatively swiftly,” says Mould.

Whether this would mean the Waitrose deal was replaced by the M&S one when it expires in 2020 is unclear. On the one hand, Mould explains, the Waitrose deal is restrictive for Ocado, requiring the latter to source 70% of its private label products from the supermarket chain.

However, as he notes, it would not be a like-for-like swap, with Mould questioning whether M&S has the scale to replace Waitrose.

There are marked differences in the product ranges of M&S and Waitrose, with Waitrose offering a wide range of goods, albeit focused on the premium end of the market. M&S focuses mainly on pre-prepared meals – clicking on the food section of the website offers a range of party platters, for example.

In this sense, Ocado offering both might be complementary.

Whether Ocado wishes to end the Waitrose deal or not, Mould says, an M&S deal would certainly provide it with a bargaining trip in upcoming negotiations.

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