Ocado and M&S pop up on reports of talks

M&S and Ocado have held "secret talks" over the launch of a food delivery service, the Mail on Sunday reported, with the high street retailer said to be looking at various ways of launching a food delivery service.

Armed with a £1bn budget, M&S would be interested in buying key distribution centres, delivery vans and lorries from Ocado, the newspaper report suggested.

Analysts at Macquarie examined the "drastic scenario" where Ocado "could carve out the retail business" and M&S could take a stake in it and become a key customer/owner.

However, with the M&S balance sheet leverage already at 2.75 times earnings, "it is tough to see MKS afford even 50% of OCDO Retail, which we value at £2.3bn".

Macquarie added: "It clearly releases significant value/cash from OCDO’s point of view to let it focus and accelerate the tech path. But OCDO needs to showcase the Retail division’s progress to existing and potential new customers for some time still. So a deal like this may be unlikely until some of these contracts are implemented and OCDO has other case studies to demonstrate the successful rollout of its Solutions platform."

With Ocado's long running deal with Waitrose not due to end until September 2020, independent analyst Nick Bubb said it was "not obvious why Ocado would want to disrupt its existing relationships with Morrisons and Waitrose" and so he understood why there had not been an agreement with M&S.

He added: "Now, there has been some criticism in the City of M&S Food’s lack of presence online, bar flowers/chocs etc, but CEO Steve Rowe has always argued that as so much of M&S Food is bought to be consumed on the same day an online offer wouldn’t work, in terms of logistics/basket size. M&S has been doing some online food trials in London, however, so either they have worked well enough, in terms of being able to make rapid delivery work, or Steve Rowe has been over-ruled by the ambitious new Food MD Stuart Machin (who has the ear of Archie Norman).

"Either way, Ocado is the obvious company to talk to, notwithstanding its existing deals with Waitrose and Morrisons, so the story makes some sense, barring the silly headline about M&S “gobbling up” Ocado. But it would be incredibly disruptive and complicated for M&S to just take over an existing Ocado warehouse like Dordon, so we must assume that the talks are at a very early stage."

Although Bruno Monteyne at Bernstein notied that it had always seemed "a time warp" that M&S had no credible home delivery, he said it was "unlikely" that M&S would be a replacement for when the Waitrose deal comes up for renewal, as Waitrose brings buying volumes on branded products "that M&S could not bring" and that M&S prices are materially higher.

"However in our view M&S could be a great UK technology customer to fill the Erith capacity (CFC 4) faster or possibly a launch customer for the immediacy-grocery concept that Ocado is working on. Ocado said they would announce immediacy-grocery this year, which offers typically a narrower range but delivers it 'right now': within 1 or 2 hours; in other words: Amazon Prime Now but with higher service levels and better ranges."