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Ocado and M&S join forces on grocery delivery in a £750m deal

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Ocado is going into business with M&S, as it sells half of its UK retail business to its new partner for £750m.

The business will continue to trade as and operate from the Ocado Smart Platform but will have access to M&S’s brand, products and customer database from September 2020, after Ocado’s current agreement to deliver Waitrose groceries expires. 

Ocado brings to the partnership its Ocado Zoom same-day delivery service, which is first being trialled in London. M&S brings access to seven million members of its Sparks loyalty club and three million M&S Bank customers. In total, say the partners, the joint venture will benefit from access to more than 12m M&S Food shoppers.

The two say that the joint venture is a “strategically compelling route to unlock growth for M&S Food through a profitable, scalable presence in the online grocery market, the UK’s fastest growing channel.” In the year to December 2, the two say, the new joint venture would have generated revenue of £1.5bn and EBITDA (earnings before interest, tax and asset write downs) of £34.2m. Additionally, the new joint venture will save the £15m paid to Waitrose in sourcing fees in 2018.  

Steve Rowe, chief executive of M&S said: “I have always believed that M&S Food could and should be online.  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.

“Combining the magic of M&S Food with Ocado’s leadership in online technology allows us to transform UK online grocery shopping by offering customers the broadest, most innovative and relevant range in UK food retail with award-winning service.  Our partnership with Ocado will create shared value for our customers, colleagues, supplier partners and shareholders, operating with a common sense of purpose and values. 

“This is a transformational step forward in shaping the future of M&S and in becoming a truly digital first retailer with at least a third of the business online.”

Ocado chief executive Tim Steiner said: “”We believe that this is the best outcome for customers, offering even greater range, service, quality and value; the best outcome for our Ocado Solutions partners, creating a stronger platform from which to innovate and develop our unique and proprietary technology; the best outcome for Ocado Solutions with a further endorsement from another leading global retailer; and the best outcome for our financial stakeholders, unlocking the significant value embedded in Ocado Retail.

“The combination 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 here in the UK. We are very excited by the many opportunities ahead.”

The £750m transaction, of which £187.5m is deferred, will be financed by equity, and the M&S board plans to raise up to £600m through a rights issue underwritten by Morgan Stanley.

M&S is a Leading retailer in IRUK Top500 research, while Ocado is Top100.

Strategic thinking

The new joint venture means that Ocado splits out its online grocery business from its fast-growing technology business which is enabling retailers around the world to tap into Ocado Smart Platform and related fulfilment services for their own ecommerce grocery delivery services.  

M&S meanwhile, says the new venture will be a key part of its transformation programme to create a profitable family of businesses within three to five years “bound together not only by shared sites but by a shared consumer brand, colleagues, values, technology and customer data.”

M&S previously trialled online grocery delivery but found it was not economic because of the high costs related to manually picking stock from store. Developing its own technology and building fulfilment centres would “delay the implementation of our transformation programme and carry significant execution risk.”

Image courtesy of Ocado

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