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What strategic gain did M&S want from Ocado?

Why did M&S agree yesterday to buy a 50% share of Ocado’s retail business for £750m?

M&S strategically acquires OcadoIt’s common knowledge that M&S has struggled in recent times causing numerous store closings and redundancies. M&S have lagged behind online shopping for years, focussing instead on their high street offerings. Trading conditions on the High Street continue to be challenging and clothing, home and food sales have all fallen significantly.

M&S chief executive, Steve Rowe believes that one third of M&S business will come from online in the future. It was thought that part of the issue could be solved by having an online delivery service. Therefore, he needed to scale up in the fastest and most effective manner in order to sell more M&S food to more shoppers.

The answer was acquiring a proven distribution channel who would also have capacity when their contract with Waitrose expires in 2020. He commented that the deal was the “only way we could have gone online within an immediately scalable, profitable and sustainable business”.

The joint venture will be called Ocado and will deliver M&S grocery products from September 2020. There are some concerns about the fit between the two. M&S has traditionally been an upmarket convenience store for shopping top-ups with average basket price of £13. Ocado serves the weekly shopper with a comprehensive range of products and an average spend of £100.

Archie Norman, M&S’s chairman and chief strategist, is bullish however because he has a long-term vision. He believes that M&S will be able to push enough of its products through Ocado to justify the price, and that Ocado will be able to retain its customers when the relationship with Waitrose terminates.

Tim Steiner, founder and chief executive of Ocado, agrees saying: “I think Steve and his team have taken an incredibly smart risk today. It’s not like going to a casino and laying down a chip. You’ve got to take calculated risks where your upside is enormous, your downside is minimal and your investment to do it is sensible.”

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