M&S and Ocado confirm joint venture

Marks and Spencer Group has confirmed a 50/50 joint venture (JV) with Ocado Group.

Under the JV, M&S is acquiring a 50 per cent share of Ocado’s UK retail business, which will be supported by Ocado Smart Platform, for a total consideration of up to £750 million, made up of £562.5 million on completion and up to £187.5 million, plus interest, payable after five years, conditional on reaching agreed financial and operational targets.

The JV will trade as Ocado.com, but with access to M&S’ brand, products and customer database from September 2020 at the latest, following the termination of the current Waitrose sourcing agreement and migration of JV sourcing to M&S.

A statement explained that M&S Food could save an estimated £70 million per annum by the third year following completion, from increased buying scale, harmonised buying terms, conversion of M&S customers who currently account for circa one third of online grocery spend, joint marketing, shared innovation, and complementary category mixes.

The transaction will be primarily financed by equity. The M&S board intends to conduct a Rights Issue to raise up to £600 million, which will be launched in due course, and which is fully underwritten on a standby basis by Morgan Stanley.

M&S chief executive 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.

“Combining the magic of M&S Food with Ocado’s leadership in online technology allows us to transform UK online grocery shopping by offering customers the broadest, most innovative and relevant range in UK food retail with award-winning service,” he continued, adding: “This is a transformational step forward in shaping the future of M&S and in becoming a truly digital first retailer with at least a third of the business online.”

Ocado chief executive Tim Steiner commented: “The combination of Ocado and M&S will allow us to grow faster, add more jobs, and create more value, as we lead the channel shift to e-commerce here in the UK. We are very excited by the many opportunities ahead.”

M&S’s admitted that a prior online trial was uneconomic, due to the high cost of manually picking from store, including costs associated with moving stock from warehouses to stores and store replenishment costs.

“Developing best in class technology and investing in fulfilment centres would delay the implementation of our transformation programme and carry significant execution risk,” read a statement.

Instead, the JV provides M&S with a profitable, scalable presence in online grocery, where currently it has a minimal presence. Online is forecast to be the fastest growing channel, increasing from an £11 billion market in 2018 to £17 billion in 2023, set to capture over 20 per cent of forecast UK market growth yet still only accounting for seven per cent of total grocery spending today.

Ocado will transfer retail customers, sales and supplier relationships, some vehicle assets and central retail functions to the JV. The JV will carry out all pricing, category management, marketing and brand communications. Ocado will provide the end-to-end e-commerce platform and access to throughput and service levels from technology in return for a fee paid by the JV under a long-term contract.

The board of the JV will be shared 50/50 between M&S and Ocado, with each having the right to appoint two directors. For five years from completion, Ocado shall have the right to appoint the chief executive, and M&S one of the JV’s directors as chair.

The management team of the JV, other than the chief executive, will be appointed by the JV board, with Lawrence Hene, currently Ocado’s commercial director, being appointed as interim managing director of the JV to lead its establishment.

The transaction is expected to close during the third quarter of 2019.

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