Ocado and Marks & Spencer confirm JV talks

Ocado has confirmed that it is in talks with Marks & Spencer about a possible UK retail joint venture, reported to be worth between £1.6bn and £1.8bn.

The online grocery specialist made the statement following media speculation that it was looking at a new UK deal to replace its existing partnership with Waitrose.

"There is no certainty that these discussions will result in any agreement or as to the timing of any such agreement," Ocado said, with M&S releasing an almost identical statement.

Shares in Ocado immediately spiked 12% on the news to 989p, while M&S was up almost 4% to 304.4p just ahead of midday on Tuesday.

Ocado will effectively split itself in two, with M&S paying £800-900m for a 50% stake in the existing Ocado.com UK online retail business, the Evening Standard reported on Tuesday, which has around 721,000 active customers.

Ocado will retain a stake but be left to focus on its overseas licensing projects, where it is working with major supermarket groups in Canada, France, Scandinavia and the US to roll out its online grocery delivery platform and robot-operated warehouses.

Ocado needs to agree on a deal before 1 March, the deadline for it to trigger a break clause with Waitrose.

The high street stalwart does not operate a food delivery service, with the retailer's small average basket size thought to make the economics of the concept too difficult.

A partnership with Ocado may seem like a step in the right direction, but, without knowing the exact shape of the deal, Thomas Brereton, retail analyst at GlobalData, warned that "this attempt to rapidly gain momentum in the online market may be a misstep with short-term gains potentially outweighed by a long-term deterioration of brand awareness online".

GlobalData estimates online penetration in food & grocery of 9.1% in 2019 will remain significantly below 24.4% for non-food, but that the online food market will be worth £19.4bn by 2023.

He added: "M&S needs to be careful that it is creating an attractive proposition that can provide long-term gains, rather than simply jumping on the online bandwagon. It would be the wrong tactic for M&S to try to emulate Waitrose’s success through using Ocado as a stepping stone; the Ocado-Waitrose partnership began over a decade ago during the infancy of online food delivery, and M&S is now looking for a foothold in a much more evolved online market.”

Naeem Aslam, market analyst at ThinkMarkets, was unequivocally positive.

"M&S joining forces with Ocado is music to investor’s ears, the news could not have come at a better time," he said. "The products offered by M&S have always been loved by its customers and M&S has a specific kind of clients who are not massively sensitive to price. They need quality products and M&S has that. It was lacking a reliable delivery source, and now with Ocado on its belt, this will improve the revenue."