Ocado has used Waitrose as its supplier for the past 20 years but the deal is set to end in September 2020.
According to the Mail on Sunday, Ocado could replace Waitrose with M&S to supply its goods. Ocado and M&S have held “secret talks” over the past few weeks about launching a food delivery service, the paper said.
M&S is understood to be considering buying distribution centres, delivery vans and lorries from Ocado.
In reaction, shares in M&S gained 2.0% to 295p while Ocado advanced 3.9% to 983p in morning trading.
The news comes as M&S chairman Archie Norman carries out his plan to turn around the business after continued struggles in the clothing and home business and a recent dip in food sales.
M&S plans to close 100 stores by 2022 as part of a strategy to move a third of its sales online.
A source told the Mail: “Archie Norman needs something transformational to make his mark at M&S and he is running out of time.
“The deal on the table is effectively buying the Waitrose part of the Ocado business and replacing it with M&S products.”
Talks most likely at very early stage, says analyst
Independent retail analyst, Nick Bubb, thinks it would be “incredibly disruptive and complicated” for M&S to take over an existing Ocado warehouse so assumes the talks are at a very early stage.
He pointed out that there has been some criticism in the market about the M&S food unit’s lack of presence online. However, chief executive Steve Rowe has argued that much of the food is bought and consumed on the same day so an online offer wouldn’t work in terms of logistics and basket size, Bubb noted.
“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),” he added.
“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.”
Strained relationship between Ocado and Waitrose
John Lewis Partnership, which owns Waitrose, was one of the early investors in Ocado but sold its stake for about £150mln in 2011. The retailer has invested heavily in its own online grocery delivery service for Waitrose so it competes directly with Ocado.
Waitrose and Ocado have had a strained relationship over the years.
One of the founders of Ocado, Jason Gissing, who has since left the business, has previously told the Guardian that John Lewis was “a complete pain in the arse to deal with” and the two companies had regular disputes.
Waitrose got its back up when Ocado signed a contract with Morrison Supermarkets PLC (LON:MRW) in 2013 to help the supermarket launch an online grocery service.
Ocado signed similar deals with other supermarkets to supply its online platform and distribution centres. Such deals have become a key driver of growth for Ocado and transformed the business into a tech firm from an online grocer.