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Ocado delivers some comfort for M&S as retailer’s non-food sales slump

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Ocado saves the day for M&S (image: M&S)
Ocado saves the day for M&S (image: M&S)
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M&S sales continue to fall as pandemic plays out, but food delivery with Ocado shows a digital way forward

M&S has reported its first loss in 94 years, losing £17.4 million in the 26 weeks to Sept. 26 – its first loss since listing its shares on the stock market in 1926.

 

The retailers tie-up with grocery delivery business Ocado, however, delivered 47.9% year on year revenue growth for the 26 weeks to 30 August 2020. Overall, M&S food sales were up 2.7% on a like-for-like basis, while clothing and home sales fell 21% – off the back of a 61.5% drop in the previous quarter blighted by Lockdown 1.0. The second lockdown starting on 5 November is likely to have a similar impact on sales, the retailer has warned.

 

Steve Rowe, M&S CEO, did have some notes of hope, stressing that the business has performed better than expected during the first half with revenue down 15.8%, outperforming the Covid-19 planning scenario by 22.8%.

 

As a result, the Group exited the period with reduced stock levels year on year and generated free cashflow. Group net debt reduced £118.5m and at the end of the period we had £1.4bn of cash and available facilities including the £1.1bn undrawn revolving credit facility.

 

The Food business has performed strongly despite substantial Covid headwinds during the six-month period achieving 2.7% LFL growth or 6.6% when excluding hospitality, which was largely closed during lockdown. It adapted rapidly to the change in shape of demand to deliver improving LFL growth across the period.

 

This was despite headwinds which included the exposure to travel and office locations, high dependence on food-to-go and a presence in full line stores in impacted shopping centre locations.

 

The purchase of a 50% stake in Ocado has also been a saving grace for M&S’s food business. This has been an exceptional period for Ocado Retail helped by Covid related increase in demand for online shopping, says Rowe. Higher than normal average basket size, combined with optimisation initiatives, drove efficiencies in customer fulfilment centres (CFCs) and lower delivery costs as a percent of sales.

 

Including exceptional anticipated insurance receipts, Ocado Retail generated a first full half year contribution to M&S Group adjusted profit before tax of £38.8m.

 

However, revenue growth at Ocado Retail is currently constrained by the capacity limits of its established CFC network, but investment is in place to drive substantial growth with 40% additional capacity coming on stream by Autumn 2021 and further growth thereafter.

 

Clothing & home digitally transformed

The Clothing & Home result was heavily impacted by the full Covid lockdown in the first quarter, ongoing social distancing and the priority to clear stock. As a result total revenue declined 40.8%, comprising a decline of 61.5% in quarter one and 21.3% in quarter two.

 

Online revenue increased 34.3% driven by strong traffic, increased conversion and lower returns. Online growth was supported by previous investment in capacity at Castle Donington distribution centre which performed well during the period, although, this growth was insufficient to offset the decline in store sales.

 

The business is emerging well ahead of the Covid- 19 scenario both in sales and stock position and there are signs that new range structures can drive sales.

 

While M&S hopes that some demand will return post-pandemic, the company is in the midst of a radical transformation process and is now focussing efforts on revamping clothing and home.

 

With the arrival of Richard Price as MD of Clothing & Home, the company is hoping to turbo charge online growth through the launch of ‘MS2’, creating an integrated global digital, data and online business division within Clothing & Home with operating flexibility to compete with pure play competition and develop our growing portfolio of guest brands.

 

Commenting on the results, Sandra Perriot, strategy director for Commerce, Retail and Experience at Cheil UK, says: “As predicted, it’s mixed bag of results for M&S. The positive news come from the company’s new online grocery business with Ocado, which has gained significant momentum since being launched at the start of September. But more importantly, a culture of innovation is the big winner at M&S. M&S has embraced disruption to accelerate the transformation of its operating model and reset the business – something that was sorely needed if M&S is to survive in the long term.”

 

She continues: “Given that data and digital culture is one of the biggest challenged faced by brands wanting to deliver best-in-class customer experience, it’s great that M&S is addressing this. M&S has also fought silos to provide a better customer experience and created single team focused on online growth called MS2. It now needs to continue convergence for better customer experience (you still can’t buy groceries from M&S so the food purchase journey is still complex) and it’s time to rethink its retail footprint as stores are a burden for M&S right now. Looking at Click & Collect or drive-through would be a good place to start.”

 

Booking a slot

With M&S stores open through the lockdown – it sells food therefore can remain open – the retailer is hoping that Lockdown 2.0’s damage will be lessened. It is also introducing a Book & Shop scheme for shoppers to book a slot to come and browse the store.

 

The slots – which are limited to 566 Foodhalls and larger stores – will be available on every hour and half hour during store opening hours, Once inside, the time shoppers can spend browsing and purchasing items is not restricted. However, just two people will be admitted per slot booked – including with children. Slots can be booked online. For those without a computer or smartphone, customer can book a slot by calling the customer service number.

 

Helen Milford, M&S Stores Director, says: “Designed by our in-house tech teams – Book and Shop does just that, helping Sparks’ customers guarantee a slot at a time that suits them and removing the need to queue should there be one."

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