M&S and Ocado form JV for home grocery deliveries, but Waitrose will compete

Tim Steiner (left) and Steve Rowe (right)

UK e-commerce logistics provider Ocado and supermarket Marks & Spencer have announced a joint-venture operation which, they said, would “transform online grocery shopping for UK consumers”.

M&S will buy a 50% stake in Ocado’s UK retail business for £750m, and the JV is expected to launch in September 2020, “following the termination of [Ocado’s] current Waitrose sourcing agreement”.

M&S chief executive Steve Rowe 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,” he said.

Ocado chief executive Tim Steiner added: “We believe 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.”

M&S has attempted to develop its own e-commerce grocery business, but it was, it said “uneconomic due to the high cost of manually picking from store, including costs associated with moving stock from DCs to stores and store replenishment costs”.

It added: “Developing best-in-class technology and investing in fulfilment centres would delay the implementation of our transformation programme and carry significant execution risk. The JV provides M&S with a profitable, scalable presence in online grocery, where currently it has a minimal presence.

“Online is forecast to be the fastest-growing channel, increasing from a £11bn market in 2018 to £17bn in 2023, set to capture over 20% of forecast UK market growth yet still only accounting for 7% of total grocery spending today.  The partnership offers a strategically compelling route to accessing this growth channel.”

Meanwhile, Waitrose confirmed that its contract with Ocado would expire in September 2020 – bringing an end to a 19-year partnership – when it will take its e-commerce fulfilment activities in-house.

Rob Collins, MD of Waitrose & Partners, said: “We have strengthened our own online business significantly and said last summer that we will double Waitrose.com within five years.  Today’s announcement will be a major part of achieving this, and in future Waitrose.com and our shops will be the exclusive places in the UK to buy Waitrose & Partners products.

“Waitrose.com sales are growing at 14.2%, well ahead of the market, and customer satisfaction scores for both fulfilment and the website are showing sustained and significant increases too.

“We are planning a second fulfilment centre to support our growing volumes in London and will be able to welcome thousands more online customers to Waitrose from the end of this year.”

Manu Tyagi, associate partner of retail and consumer goods at Infosys Consulting, said: “M&S’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. Signing a deal with Ocado is one way to make this happen fast.

“With over 30 store closures in the past few months, and a slowdown in openings of its Simply Food stores across the UK, M&S’s drive towards digital innovation has moved to the top of the agenda.

“As M&S’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 its most successful revenue stream with the growth of online shopping and drive its revenues up further.

“But while expanding its online offering into grocery seems like a good move on paper, the question will be whether the new M&S-Ocado partnership can hold onto current Ocado customers, who may be more loyal to the Waitrose brand than to Ocado itself. With Waitrose on the way to creating its own delivery service once the Ocado deal runs out, M&S will be facing serious competition,” he said.