M&S puts all its eggs in Ocado’s basket
As Covid-19 batters its clothing business, retailer hopes to profit from online grocer tie-up
In less than two weeks, Ocado will find out what its customers valued more: its slick website and customer service or the upmarket groceries supplied to it by Waitrose.
But for Marks and Spencer, whose produce will replace Waitrose’s on Ocado’s site from September 1, the stakes are even higher.
For the 136-year-old retailer, which this week announced 7,000 job losses, the biggest cull in its history, the Ocado tie-up is a key part of its strategy to boost food profits as the coronavirus pandemic piles pressure on its clothing business.
It will take M&S, whose food shoppers currently spend an average of less than £20 per visit, into the online grocery market — the fastest-growing part of the sector — for the first time.
“Ocado was an absolute no-brainer,” said Stuart Machin, a veteran of three of the UK’s four biggest supermarkets who was hired to run M&S food in 2018. The typical Ocado customer spends more than £100 on every shop.
Mr Machin’s plan is for customers to do more family-sized shops in M&S, as well as the “top-up” visits they currently make.
“Customers came to see M&S as a place for top-up, convenience or special-occasion shopping,” he said. “We can’t be all things to all people and we can’t have every brand — but we can be a viable solution for a family shop.”
The Ocado launch comes at a pivotal juncture for M&S. The retailer has been in relative decline for more than a decade but the pace has accelerated in recent years. Profits have slumped, along with the share price, it has racked up almost £2bn in exceptional charges, and its clothing business has defied repeated attempts to reverse sales declines.
Last year, it was ejected from the FTSE 100 for the first time since the index’s inception. Asos, an online fashion retailer founded in 2000, is now valued at more than twice as much.
Supplying Ocado will generate more volume for M&S. But it will also put the full range of M&S products in front of a larger audience. That is significant because only a small number of its own stores are able to stock its full range.
Mr Machin’s push for a bigger share of customers’ wallets has brought a rethink on pricing. This week, the company launched an advertising campaign highlighting what it has dubbed “remarkable value”, such as cutting the price of a white loaf from £1.15 to 65p.
“We wanted to be a bit more competitive on the items that people buy the most,” he said.
But the pivot to food brings risks of its own.
While M&S’s share of the food market is small, its business has been far more profitable than rivals’. Over the four years from 2015 to 2018, Ocado Retail made an average operating margin of 0.8 per cent, according to its statutory accounts. In the last of those years, M&S’s own food business achieved 3.6 per cent.
Some worry that the quest to widen its appeal will result in M&S swapping high-margin baskets for low-margin trolleys. “That is a danger,” said independent commentator Richard Hyman. “It is not at all clear to me how M&S is going to prevent significant margin dilution here.”
“If you include clothing, which they seem to be managing down in size, then lower-margin sales are going to be an ever bigger part of the mix,” he added.
Food profits were greater than those of clothing last year, the first time the profit split has been disclosed. Over the next two years, the gulf will be wider still because of the impact of Covid-19.
M&S spent £750m buying a half-share of Ocado’s retail business and the pandemic has made its stake a more valuable asset — on some estimates, it accounts for almost all the equity market value of the company. But M&S can only book a share of its profits, and they are not large. Last year its contribution, for seven months, was £2.6m.
Mr Machin played down the idea that food would soon be driving the business. “We’ve got a great food business with a lot of loyal customers. We’ve a great brand and we have lots of stores where prior to Covid both food and clothing were doing well.”
But one burden for M&S is the nature of its store estate, which did not evolve with family shopping trips in mind. Most of its larger stores are in high streets, where layout, access and parking present problems, while many of its Simply Food outlets are too small to carry large ranges.
“We are probably still too weighted towards small footprints at the moment,” Mr Machin acknowledged.
M&S was already planning to close more than 100 of its older high street stores and relocate some to out-of-town parks where access is easier.
The pandemic’s impact on the business has forced it to take a tougher stance on its bloated cost base, to bring it in line with falling sales.
“We did have targets [for various types of store] before but we are putting the rule over it again,” Mr Machin added. “It may be that in future there are some stores with more food space than clothing, but we need to get through these next few months and then look again at that bigger strategy.”
Another person familiar with the business pointed out that while upgrading the Simply Food estate to bigger premises was relatively easy, swapping high street stores for units on retail parks was not.
“I think Archie [Norman, M&S chairman] has found it a lot harder than he thought to get out of those high street stores,” the person said. So far, it has only closed 56 of them.
Jan Clark, a customer using the M&S Food Hall in Rayleigh, a commuter town in Essex, said the store was not yet a place where she could do all her shopping, even though it is one of only about 30 stores that does stock the full M&S range.
Given the time and expense required to make the retailer’s store estate more food-friendly, and the problems that Covid-19 is causing an already challenged clothing business, it is clear why there is so much riding on the Ocado tie-up.