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Taking stock of the M&S and Ocado move to join forces for online grocery delivery

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We reported earlier this week on the £750m joint venture partnership struck by M&S and Ocado as the two join forces for online grocery delivery. Today we take a more considered view, with input from industry analysts and commentators.

Earlier this week we heard from M&S and Ocado as they announced that M&S was to go into business with Ocado, buying half of its UK retail business for £750m.

The new joint venture will 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. 

At the time, the two said that the joint venture was 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.” 

And Steve Rowe, M&S chief executive 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.”

But is this a good deal or simply an example of M&S coming late to the online party? 

Certainly, industry insiders believe, it’s a recognition that grocery retailers must now sell their wares online in order to satisfy consumers’ demand for convenience. Luke McKeever, chief executive of merchandising specialist Attraqt, said: “M&S has long been a champion for premium food and grocery experiences. This JV with Ocado signals their recognition that consumers now demand the convenience of online shopping on a regular basis. Price is not the only differentiator in the grocery landscape – being distinctive in an age of online shopping is one of grocery retail’s’ greatest challenges. M&S will be now be under pressure to deliver a balance of an efficient and functional online experience together with the premium and personalised experience consumers have come to love from their stores.”

Manu Tyagi, associate partner, retail and consumer goods at Infosys Consulting, agrees that M&S must deliver its customers convenience. “M&S’ deal with Ocado marks the high street retailer’s continued fight for survival, as it enters into the home delivery game. While shareholders are sceptical given the £750m price tag, M&S is clearly taking steps to respond to growing customer demand for home delivery of groceries – and signing a deal with Ocado is one way to make this happen fast.

“With over 30 store closures in the last few months, and a slowdown in openings of its Simply Food stores across the UK, M&S’ drive towards digital innovation has moved to the top of the agenda. As M&S’ food business makes up 61% of its revenue, and its online sales grew by 5.2% in 2018, the retailer is clearly hoping to blend their most successful revenue stream with the growth of online shopping, and drive its revenues up further.”

But, questions Tyagi, does Ocado risk losing those customers who are loyal to the Waitrose brand that it will now only deliver up to 2020? And will M&S’ range compensate for that? “With M&S currently seen as a ‘small basket’ retailer, another question will be whether this investment in online grocery can encourage M&S customers to spend more on groceries with the retailer,” said Tyagi. “Having a customer-centric strategy, with continued investment in loyalty management and consumer personalisation, of which M&S’ Sparks scheme is a strong example, will be crucial if M&S wants to grow its customer base with the introduction of home delivery. It’s also vital that M&S doesn’t completely disregard its stores as it looks to grow online – continuing to offer the best in-store experience will be key to driving online grocery sales and overall revenues.”

Focus on premium

Forrester’s George Lawrie believes it can work – as long as it focuses on the premium end of its business. Lawrie, vice president and principal analyst at Forrester, said: “This model can work for M&S if it sticks to the premium and pre-prepared foods for which it is famous for. In other words, it will work for Champagne, fresh oysters, canapes and caviar, but not for things like cling film and carrots. This also marries well with Ocado’s vision, as it runs its own delivery fleet to ensure customers receive a premium experience, with smartly dressed drivers delivering your groceries straight to your kitchen table.

“The importance here of luxury ultimately comes down to cost. Normally you’d expect picking, packing and transporting produce to amount to around 25 to 30% of the cost of a single item, a cost that high margin retailers can absorb but low margin grocery cannot – unless everything is highly automated. This is why focusing on luxury items is key here, as the more luxurious a product is and the more preparation there is involved, the less price sensitive the customer is.”

Catherine Shuttleworth of shopper marketing agency Savvy reminds us that M&S has been talking about delivery food online for many years. She says this new venture makes sense for both partners. 

“It was back in 2008 when the then commercial food director of M&S said that the retailer was: ‘considering adopting a model similar to Ocado, a company that delivers groceries on behalf of the supermarket Waitrose’,” said Shuttleworth.

“In the intervening 11 year period, the retail market in food has completely transformed – M&S have seen off three chairmen and three chief execs, but still haven’t delivered any online food offering. Whilst sometimes there is real merit in zigging whilst others zag, Archie Norman and his new experienced team in food – lead by Stuart Machin and soon to be joined by Tesco star George Wright – know that the M&S food business needs a radical solution to capture the hearts minds and stomachs of younger shoppers and there’s no point hoping that they can just wait for the shoppers to roll up to M&S stores – that’s just not happening. So a deal with Ocado makes sense, saves time and money. M&S are out of the trap quickly and have a whole new massive group of digital savvy shoppers to go for, with positive attitudes to home delivery and a relatively high grocery spend.”

Ocado, meanwhile, will be able to focus on selling their technology solutions around the world while sharing the load of the day-to-day retail business,” she added.

Too high a price?

But GlobalData’s Patrick O’Brien questions whether M&S is paying too high a price. O’Brien, UK retail research director for data and analytics company Global Data, said: “Ocado’s deal with M&S shows how desperate the latter was to be able to get into food online, and reminds us of the predicament Morrisons found itself in, in 2013 when, having watched competitors take market share, it too paid a high price to enter the market, having worried about getting left behind.

“With M&S paying £750m for a 50% stake, on a business which it said would only have made EBITDA of £34.2m in the previous year, it is no wonder its share price took a whack this morning. But M&S is under pressure to reinvent itself somehow, lest it be considered a retailer in perpetual, inevitable decline due to the shift to online. We are not convinced this is the right move though. Price aside, the deal is predicated to some extent on being able to attract M&S shoppers to the Ocado JV, while not alienating Ocado shoppers when the Waitrose products they have been buying are replaced by M&S equivalents.

“This seems a difficult sell – sure it has M&S online and Sparks card holder data, but M&S food shoppers typically buy small baskets rather than the £100+ average at Ocado. Those that want an online food service either shop at Ocado already or a competitor, and getting them to switch will be an expensive business. It may have overestimated the lure of M&S products, and indeed the questionable benefits of being able to order an M&S dress with a weekly shop.

“The deal may make M&S look more modern overnight, but to make sense to shareholders, it will need to deliver the significant bottom line profits that have eluded Ocado’s retail business to date.”

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