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Flash Report

Marks & Spencer Confirms Joint Venture with Ocado

Coresight Research

Key Points

  • The UK’s Marks & Spencer (M&S) and Ocado Group have announced the creation of a 50/50 joint venture.
  • M&S is acquiring a 50% share of Ocado’s UK retail business, for a total consideration of up to £750 million.
  • A combined M&S-Ocado service offers M&S a way to sell online while circumventing the unfavorable economics of its typically small basket sizes.

On February 27, 2019, M&S and Ocado announced a joint venture, with M&S paying up to £750 million, including a deferred consideration of up to £187.5 million, to acquire a 50% stake in Ocado’s UK retail business. M&S will conduct a rights issue to raise up to £600 million toward the cost of the deal. The deal does not include Ocado’s technology business, which sells services to other retailers, including Kroger in the US and Sobeys in Canada.

The joint venture will trade as and benefit from access to M&S’s brands and products, as well as its customer database; this integration will occur from September 2020 at the latest, following the termination of Ocado’s current sourcing agreement with grocery retailer Waitrose.

M&S said that, for the 52 weeks ended December 2, 2018, the newly created joint venture would have generated revenue of £1,468 million and EBITDA of £34.2 million. The new sourcing arrangement will mean the JV will not incur sourcing fees that Ocado currently pays to Waitrose, which equated to over £15 million in 2018. M&S pointed to potential synergies for M&S Food of at least £70 million p.a. to be achieved by the third year following completion — due to increased buying scale, harmonized buying terms, conversion of M&S customers to the new venture, joint marketing, shared innovation and “complementary category and regional mixes.”

M&S CEO Steve Rowe 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.”

The deal will give M&S a meaningful online grocery service for the first time, although it has launched several localized trials since 2017. M&S’s typically small average basket size makes a stand-alone online food offering uneconomical, as the retailer operates as a premium-positioned, limited-range convenience retailer. A joint-venture will combine M&S’ product line with the much broader grocery offering already on, and this will support basket sizes. Ocado recorded an average order value of £106.85 in 2018 — far higher than any likely average M&S online basket.

See our January flash report Legacy UK Retailers Tesco and Marks & Spencer Think Radically to Expand Margins and Revive Revenue Growth for more background on Marks & Spencer.

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