Will Marks & Spencer’s joint venture with Ocado turn around the struggling retailer’s fortunes?
YES, says Adam Vettese, investment analyst at multi-asset investment platform eToro
When you think of Marks & Spencer, you think of food. And not just any food, but top-quality food.
In fact, food is so important to M&S that it now accounts for 58 per cent of group revenue – nearly double the amount that its clothing and home division makes.
At the same time, the UK’s online grocery market is forecast to grow 60 per cent to nearly £20bn by 2023.
Therefore, M&S’s foray into the world of online groceries is of vital importance if it is to cement and grow its place in the market.
The joint venture with Ocado – which has the best technology in the business – not only does just that, it will also allow M&S to cut costs and bolster its finances in the long run.
Of course, both companies will have to win over the sceptics, but if they get things right there is every possibility that M&S’s new online shopping presence can offset the poor performance of its failing clothing and home division.
NO, says Neil Wilson, chief market analyst at Markets.com
M&S increasingly looks like a grocer that also does clothing, with 60 per cent of revenues now coming from food. So, the Ocado tie-up is central to the turnaround strategy.
But at about £800m it’s an expensive entry into a sector – online groceries – that doesn’t make any money for the major supermarkets. Goldman Sachs reckons that it will only deliver £10m a year in free cash flow by 2024.
M&S basket sizes are tiny at about £14, versus the £108 at Ocado, making online uneconomic. The joint venture will of course see this figure rise, but M&S seems to be banking on consumers changing their habits, by making M&S the place for their big weekly shop rather than for the occasional top-up or getting a prawn sandwich on the go. This seems hard to imagine in value-conscious Britain where discounters are on the march.
And as Waitrose goods are switched out for M&S products, customer loyalty on the Ocado platform will be tested, particularly as the John Lewis grocer expands its £1bn online operation.
Main image credit: Getty