M&S/Ocado – Down To The Crossroads?

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By James Watson – 1 March 2019

Myth has it (and Eric Clapton will back me on this) that hard up bluesman, Robert Johnson, ‘went down to the crossroads’ in Clarksdale, Mississippi one night to sell his soul to the devil in return for the guitar playing talent that would subsequently make him a legend. After a short but prolific career thereafter he was poisoned in a club by a jealous rival bringing a premature end to his career and confirming for many that the pact had indeed been made.

This week some analysts were questioning whether, in acquiring a £750m, 50% stake in Ocado’s retail business, M&S were also entering a similar Faustian transaction; short term improved performance at what could be a very significant cost.

As Ocado has worked out way ahead of the competition, digital sales platforms are time consuming and very expensive for retailers to develop and there is an extremely lucrative market in selling the tech to those that lag behind. WM Morrison made the same uncomfortable decision as M&S to bite the bullet and engage with Ocado to provide them with a home delivery solution, albeit back in 2013 and has subsequently been developing their own in-store fulfilment model in order to reduce the costs of this service that all the grocery operators are forced to accept.

This move by M&S will give them this loss-making home delivery platform they crave at a considerable cost, bringing them up to speed with their current peer group (and Amazon). They will fund the deal by selling £600m of shares and cutting their dividend by 40%. The JV will be called Ocado and will start delivering in 2020, at which point Waitrose’s home delivery deal with Ocado will end and Waitrose will commence operating their own online fulfilment service.

This move by M&S is further evidence the grocery sector is preparing for a landscape that doesn’t yet exist – which is why the terms of the CMA’s rejection of the Sainsburys-ASDA merger seems particularly unimaginative.

As a result ASDA is now undoubtedly in play. The CMA’s stated position rules out any interest from all the other domestic players with the exception of Aldi and Lidl – and the ASDA portfolio doesn’t look like a fit for them.

So, who does that leave? Maybe Jeff Bezos has been listening to some old blues records and is picking up the phone to Walmart right now…