M&S and Ocado seal grocery deal, will it help or harm fashion?
So it's official. This year's worst kept retail secret – a link-up between tech/delivery specialist Ocado and retail giant M&S – is actually happening. And while many in the fashion sector might think it's irrelevant to them as this is purely a grocery deal, that's not actually the case.
Yes, it is a grocery joint venture in which the two companies are 50-50 partners as they aim to “transform online grocery shopping for UK consumers”. But its ramifications will also be felt beyond grocery for M&S.
Looking at the detail, M&S is acquiring a 50% share of Ocado’s UK retail business, for a total consideration of up to £750 million, including a deferred consideration of up to £187.5 million, plus interest.
The JV will trade as Ocado.com but benefit from access to M&S’s brand, products and customer database from September 2020 at the latest, following the termination of the current Waitrose sourcing agreement and migration of JV sourcing to M&S.
The aim for M&S is to have 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.”
Long-term, M&S said there will be significant synergies that will help it to save tens of millions, although in the meantime, in order to finance the deal, it will be launching a £600 million rights issue.
But what does it mean for the wider M&S business? Food is generally seen as being the strongest parts of the M&S offer, but its previous online trial “was uneconomic due to the high cost of manually picking from store” so the company was unable to maximise a major growth opportunity.
If this deal can reignite growth in the food category, it will take some of the pressure off M&S’s bottom line overall, which should be good news for the business in general.
However, it also leaves the retailer’s underperforming Clothing & Home division more exposed. If foods can be used to generate explosive growth at the company, will there be extra pressure to be more ruthless with a lagging fashion offer?
And how will it affect store traffic? A large number of people who just pop into an M&S store to pick up their lunchtime sandwich can also be converted into customers for its underwear, fashion, beauty and homewares (even if the Millennial customer isn't being converted in large enough numbers).
But while those lunchtime shoppers will still turn up, the family-focused consumer who does a bigger weekly shop and who might also be more likely to browse the fashion offer, could be more inclined to shop from home rather than going to the store itself. That could put a dent in the number of people also looking at the wider M&S offer.
However, on announcing the deal, M&S focused on the positives and said that it would offer “cross-marketing opportunities for M&S’s Clothing & Home and financial services businesses.”
It seems we'll just have to wait and see how it pans out.
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