A double-whammy of joint venture news on Wednesday has brought to the fore the ongoing rush by large companies to catch-up with the digital revolution as they try to regain lost ground from online competitors.
Retailer Marks and Spencer Group PLC (LON:MKS) announced a £750mln funding injection into a joint venture (JV) with online grocer Ocado Group PLC (LON:OCDO), giving its customers an online food delivery option for the first time.
Meanwhile, broadcaster ITV plc (LON:ITV) unveiled a tie-in with the BBC to create BritBox, an online streaming service designed to challenge Netflix Inc (NASDAQ:NFLX).
Given that M&S has chosen to anchor itself to an established digital presence like Ocado while ITV and the BBC have elected to pool their efforts in online streaming, could the consolidation strategies be the key to making up for their delayed entry into the digital market?
Staying convenient for M&S
For M&S, the investment in its JV with Ocado not only reduced the looming (and possibly even higher) cost of developing its own capabilities but has also provided access to a whole host of benefits from digital retail.
Tom Musson, an analyst at broker Liberum, said that with M&S’s current infrastructure, an online offering on such a large scale would not have been profitable for the company to build alone.
READ: M&S set for big rights issue, divi cut to fund online grocery joint venture with Ocado
A large sum upfront for an easy access, ‘plug-and-play’ system with Ocado was likely to have sounded better than the riskier own-brand operation as M&S is currently seeking ways to maximise profits from the food offering to offset a decline in its clothing business.
Musson adds that an additional sweetener for the deal could be the vast amount of online data that Ocado generates from its customers.
“[With the data] M&S can see what products are selling online, and it can test innovations online and shove that into its stores”.
Staying relevant for ITV
Meanwhile, the media sector is facing its own tug-of-war between established outlets and digital challengers, with ITV’s decision to link up with the ‘beeb’ for BritBox seeming like a shrewd move given the platform's success in the US, where it has half a million customers.
With the BBC’s iPlayer service ranking second behind Netflix as the most widely used streaming service in the UK at 61% compared to 70% for Netflix, ITV’s own 29% share of the market would be more than enough to leapfrog both Netflix and Amazon Inc’s (NASDAQ:AMZN) Prime video service at 44%, provided the fused content libraries keep similar audience numbers as their separate predecessors.
READ: No World Cup boost and Brexit uncertainty to dent ITV’s first-half profits
While analysts are confident that taking the content fight online is a good strategy, it will also tap into the changing nature of advertising.
With ITV’s advertising revenue forecast to fall by about 3%-4% this year, pushing more content and adverts into a space with a rapidly growing viewer base seems like a critical strategic move.
Could the banks be next?
Aside from retail and media, another segment seeing a lot of disruption from digital and online technology is banking.
The sector has in recent years become littered with several “challenger” banks, start-up operations that have frequently eschewed the use of branches in order to operate purely online and via phone apps to allow easy access for their customers. Examples include bright-orange debit card issuer Monzo as well as Starling Bank and Atom Bank.
Given that these start-ups have developed their infrastructure around the use of online technology, one of the ‘big four’ like Lloyds Banking Group PLC (LON:LLOY) or Royal Bank of Scotland Group PLC (LON:RBS) taking out one of the challengers and integrating their systems to push their own digitisation strategy doesn’t seem that far-fetched.
Nicholas Hyatt, equity analyst at Hargreaves Lansdown, however, says that currently, the larger banks have no real need to improve their current digital offering, or at least not for the potential US$1bn+ price tag it would require to buy a challenger.
For one of the larger institutions to consider the acquisition it would have to fall “significantly” behind its competitors, Hyatt said, adding that a lack of extensive lending capabilities among most challenger banks, which mostly just hold deposits, makes them look much less attractive.