Is the Marks & Spencer and Ocado partnership just what shoppers ordered, or an expensive mistake?

Both brands have a focus on a quality shopping experience but experts have questioned how many M&S customers will be tempted to go online for their grocery shopping

‘It will work for champagne, fresh oysters, canapes and caviar, but not for things like cling film and carrots,’ says George Lawrie, principal analyst at market research firm Forrester (Reuters)

Marks & Spencer has finally moved into the online grocery market with its £750m tie-up with Ocado but the deal has received a mixed reaction.

Could the combination of two companies with very different pedigrees but a similar focus on quality be just what shoppers orders or an expensive mistake?

Too expensive?

Patrick O’Brien, research director at GlobalData, says M&S may have paid too much for a new joint venture with questionable benefits for shoppers.

The business would only have earned £34m last year, O’Brien points out, making M&S’s £750m investment look pricey.

But the deal offers a certain logic for a struggling department store chain. “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,” says O’Brien, adding that he is not convinced this move is the right one.

To make it work, M&S needs to attract shoppers to Ocado’s platform while not alienating existing customers when Waitrose products are replaced by M&S ones; a “difficult sell”, says O’Brien.

He argues that M&S food shoppers typically buy small baskets rather than the £100-plus average at Ocado. Many of M&S’s customers that want online grocery shopping are already Ocado customers, he says.

“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.”

Champagne and caviar

The new tie-up can be a success but only if M&S sticks to the premium products it’s famous for like, says George Lawrie, principal analyst at market research firm Forrester.

“In other words, it will work for champagne, fresh oysters, canapes and caviar, but not for things like cling film and carrots,” he says. This marries with Ocado’s vision of a premium delivery experience, with smartly dressed drivers delivering your groceries straight to your kitchen table.

Luxury deliveries work better because of cost, Lawrie explains.

“Normally you’d expect picking, packing and transporting produce to amount to around 25-30 per cent of the cost of a single item, a cost that high margin retailers can absorb but low margin grocery cannot – unless everything is highly automated.”

Full circle

M&S clearly can’t compete with the big supermarkets when it comes to customers’ weekly shops, says Paul Mumford at Cavendish Asset Management, which holds shares in M&S.

He is also pessimistic about the deal, describing the £600m M&S is raising to pay for the new venture as an “extravagant use of shareholders’ money”.

“The motivations behind this deal for M&S are clear, as the company has long struggled with an online offering that is not up to scratch.”

The benefits to M&S of an online food shopping are not certain because of the limited range of products it stocks, says Mumford. Consumers see it as a place to top up their weekly food shop with premium items, rather than somewhere for a large weekly shop.

But that’s not so much a problem as it might once have been because Ocado has become less dependent on Waitrose products and now stocks broad range of own-brand and private label products, says Stephen Lienert, senior analyst at Jefferies.

“Ocado therefore goes full circle: whereas before people used Ocado to access Waitrose products, now the supermarkets want to use Ocado.”