The joint venture is due to kick off in September 2020 and will still be branded as Ocado. Shoppers will no longer be able to buy Waitrose products through Ocado, but, as a replacement, about 4,500 M&S products will be added to the Ocado range.
This is a huge move that will affect M&S, Ocado and Waitrose. In this article we’re going to take a look at how the supply chain might be affected by the deal, but first let’s look at why the deal was done.
The M&S Plan – a 290,000 Order Pipeline
In recent times M&S has seen sales decline across all business lines; they see online as the future and see the Ocado deal as a way to get into the game quickly.
M&S Chief Executive Steve Rowe has called the deal a “win-win” and thinks it will “drive long-term growth”.
There is a consensus that online retail shopping is growing fast and M&S is gambling in it being better to pay now for market share than attempt to build out its own infrastructure – which could take years. Ocado has 290,000 orders a week, so getting access to that pipeline is obviously attractive.
Image courtesy of www.bbc.co.uk
Laith Khalaf, Senior Analyst at Hargreaves Lansdown, said: “Customers tend to shop at M&S for special occasions or convenience so the average basket size is £30, at Ocado it’s £100; this makes an online proposition viable (for M&S).”
Ocado Seems Pleased – 12 Million Shoppers and £750m
Ocado gets access to M&S’s database of shoppers, plus some investment to improve its infrastructure.
Of course, the risk is that shoppers use Ocado for their Waitrose products and a change to M&S would signal mass defections to Waitrose’s own online shopping platform. Tim Steiner, Ocado’s Chief Executive, is confident that the move will help Ocado “acquire more customers”.
Waitrose products account for 25% of Ocado’s sales, but Steiner is confident that “extensive research” suggests customers are “very happy ” for Ocado to stock M&S instead of Waitrose.
What the Market Says…
The M&S share price dropped by 12% when the joint venture was announced, which wiped £550m off the company’s market value – a reflection of an opinion in some quarters that the £750m price tag was too high.
Paul Mumford, investment manager at Cavendish Asset Management, called the deal an “extravagant use of shareholders’ money”.
Nick Bubb, an independent analyst, said: “It is hard to understand why M&S wanted to buy into the Ocado infrastructure, rather than just become a partner.”
What Customers Say…
An HSBC survey of 250 Ocado customers reported:
- 22% would no longer remain with the company if it didn’t sell Waitrose products.
- 37% actually thought Ocado was owned by Waitrose.
David McCarthy, Head of Consumer Retail Research at HSBC, concluded that “a meaningful proportion of customers said their loyalty is to Waitrose”.
What Does the Future Hold?
For Ocado, the bet is that the possible customer defections will be offset by the new cash to invest in infrastructure and international partnerships.
For M&S, their hope is that the big price they’ve paid proves good value as they try to capitalise on the growth of the online grocery market. The current share price tells us the market thinks the deal was a bad one for shareholders, but M&S asserts the deal will be “transformational”.
For Waitrose, having lost a key route to market, they will need to get their online shopping business up to speed to maintain market share.
At Red Flag Alert, we’re mainly interested in how suppliers are affected. There are tens of thousands of SMEs in the supply chains of Waitrose, Ocado and M&S – let’s take a look at how this may affect them.
Fragmentation is Good
Monopolies are bad for suppliers – healthy competition is good. With M&S making such a big play into the online grocery market, suppliers have more potential buyers for their wares.
What Are the Risks?
Although the macro environment may be positive, a supplier shake-up looks likely.
- Waitrose suppliers that are selling well on Ocado may see a big reduction is sales if that channel isn’t adequately replaced.
- M&S’s chief executive said he expected: “£70m of synergies from cost savings and increased buying power” – an ominous message for suppliers.
- If there is a big customer defection from Ocado this can have a big effect on Ocado suppliers who lose out on sales from defecting customers.
- It’s not just food suppliers – marketing, logistics, facilities and business service suppliers will be affected as the battle for online supremacy hots up.
One thing is for certain: suppliers that have had strong and stable contracts are entering a period of uncertainty. There are going to be winners and losers up and down the supply chain – if you are a business in this supply chain now is the time to invest in business intelligence.
You Need Business Intelligence
Red Flag Alert is a market-leading credit referencing database – we specialise in giving businesses the data to grow – and to protect – their business.
Our database gives you comprehensive information on every UK business. It captures all available information and uses a detailed algorithm to give each business a financial health rating – these ratings predict insolvency.
If you supply a business that has a contract with any of the key players then you need to keep a very close eye on its financial health – Red Flag Alert will pick up early warning signs that can impact financial health.
Because our ratings accurately predict future insolvency, if any of your clients are encountering financial distress you can manage your credit risk effectively.
Our business monitoring capability allows you to track your clients and potential customers for key information you will need to act on.
For a free consultation about how you can use Red Flag Alert’s data to protect your business, please get in touch with Richard West on 0344 412 6699 or firstname.lastname@example.org.