High price paid for Ocado highlights weakness of M&S, says GlobalData

In response to the announcement that M&S is paying £750m for a 50% stake in a joint venture with Ocado,

Patrick O’Brien, UK Retail Research Director for GlobalData, a leading data and analytics company, offers his view:

“Ocado’s deal with M&S shows how desperate the latter was to be able to get into food online, and reminds us of the predicament Morrisons found itself in, in 2013 when, having watched competitors take market share, it too paid a high price to enter the market, having worried about getting left behind.

“With M&S paying £750m for a 50% stake, on a business which it said would only have made EBITDA of £34.2m in the previous year, it is no wonder its share price took a whack this morning. But M&S is under pressure to reinvent itself somehow, lest it be considered a retailer in perpetual, inevitable decline due to the shift to online. We are not convinced this is the right move though. Price aside, the deal is predicated to some extent on being able to attract M&S shoppers to the Ocado JV, while not alienating Ocado shoppers when the Waitrose products they have been buying are replaced by M&S equivalents.

“This seems a difficult sell – sure it has M&S online and Sparks card holder data, but M&S food shoppers typically buy small baskets rather than the £100+ average at Ocado. Those that want an online food service either shop at Ocado already or a competitor, and getting them to switch will be an expensive business. It may have overestimated the lure of M&S products, and indeed the questionable benefits of being able to order an M&S dress with a weekly shop. 

“The deal may make M&S look more modern overnight, but to make sense to shareholders, it will need to deliver the significant bottom line profits that have eluded Ocado’s retail business to date.”

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