Marks and Spencer is doubling down on its joint venture with Ocado, and may one day take complete control of the business.
M&S teamed up with Ocado in 2019, whereby the latter delivered the grocers' products to customers.
After a positive start, in which the FTSE 250 retailer gained a £78.4mln share of the net profit, it swung to a loss of £29.5mln in today’s full-year results.
Much of the early success of the JV was attributed to the lockdown, where pure online stocks like Ocado, Asos and Boohoo thrived.
The landscape has changed since then, with delivery services deemed pricier than in-store shopping, while the lifting of restrictions also released pent-up demand for supermarkets and the high streets alike.
Aside from problems with the partnership, Ocado is drowning in its own issues, including a widening of losses and an identity crisis.
One wouldn’t blame Marks and Spencer if it decided to back out of its £575mln initial investment given the outlook, at least at face value, looks bleak.
Instead, Marks and Spencer has decided to lean further into the venture.
The Ocado Retail reset is underway, as outlined in today’s results, with the retailer deepening its collaboration with Ocado.
Part of the turnaround includes improving the customer experience, introducing cost-cutting measures and leveraging the potential of the M&S customer base through its increased offering, it said.
While times may be tough, the principles around the joint venture are sound, according to Zoe Gillespie, investment manager at Brewin Dolphin.
“There is work to do, but once capacity issues are sorted and the offering is finessed it should be a good string to both companies’ bows,” Gillespie added.
Leaning into the joint venture is the right call, a belief held among City analysts, and one that could culminate with Marks and Spencer assuming full control over some time, according to retail Clive Black of Shore Capital
Marks and Spencer does not have a full-service food offer, nor does it have a store estate capable of providing one currently, meaning the Ocado Retail service is key.
“If it is to have a presence of 10% in the market that is grocery online, it needs to hang in with Ocado, with considerable M&S label sales through this vehicle,” said Black added.
Ocado Retail may have fallen on tough times, but Marks and Spencer itself is on a roll and doubling down to achieve sustained success might be another good call.
Shares in Ocado bounced 6% to 427p, a sign investors are pleased with Marks and Spencers' decision.