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Delivery tie-up

M&S and Ocado confirm 50/50 grocery joint venture

Marks & SpencerMarks and Spencer and online delivery chain Ocado Group have confirmed the formation of a joint venture.

Under the JV, M&S is acquiring a 50% share of Ocado’s UK retail business, which will be supported by Ocado Smart Platform, for up to £750m, including a deferred investment of up to £187.5m, plus interest.

The JV will trade as 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.

M&S said this morning that for the 52 weeks ended 2 December 2018, the newly created JV would have generated revenue of £1,468m and EBITDA of £34.2m, taking into account the newly created OSP contract and other fees and services. Furthermore, under the new sourcing arrangement the JV will no longer incur sourcing fees payable to Waitrose, which were more than £15m in 2018.

The deal will produce estimated synergies for M&S Food of at least £70m a year, to be achieved by the third year following completion.  These are expected to arise from increased buying scale, harmonised buying terms, conversion of M&S customers who currently account for about one-third of online grocery spend, joint marketing, shared innovation, and complementary category and regional mixes;

The transaction will be primarily financed by equity.  The M&S board intends to conduct a rights Issue to raise up to £600m, which will be launched in due course, and which is fully underwritten on a standby basis by Morgan Stanley;

Concurrently the M&S dividend per share is being reset by 40% to a sustainable level from which to grow in line with earnings over time.  As a result, it anticipates paying a final dividend in respect of 2018/19 of 7.1 pence per share.

Steve Rowe, M&S CEO 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.

“This is a transformational step forward in shaping the future of M&S and in becoming a truly digital first retailer with at least a third of the business online.”

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.

It was reported last month that the two held talks about a deal to replace Waitrose with M&S as its main groceries supplier. Ocado’s deal with Waitrose, which is owned by John Lewis Partnership expires in September 2020.

Earlier this month Ocado posted a steeper full-year pre-tax loss before tax of £44.4 million for 2018, compared to a loss of £9.8m in 2017, reflecting the impact of heavy investment in technology and warehouses.and there have been reports of a strained relationship between Ocado and John Lewis.

One of the founders of Ocado, Jason Gissing, who has since left the business, told The Guardian that John Lewis was “a complete pain in the arse to deal with” and that the two companies had regular disputes.


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