Shares in Marks & Spencer tumbled the most in two-and-a-half years yesterday after the retailer said it will finance a nearly €870m investment in online retailer Ocado with new shares and cut its dividend.
M&S plans to offer as much as £600m (€696m) in new stock to help pay £750m for a 50% stake in the partnership, diluting existing investments. Its shares fell up to 11.5%, the most since June 2016, while Ocado rose up to 6%.
The agreement raises questions about the strategy of M&S, which will unseat John Lewis Partnership’s Waitrose as the tech startup’s main grocery supply source as of September 2020.
Until now, M&S has focused on selling small baskets of premium-price grocery items, while large orders are more viable in low-margin e-commerce.
“M&S still haven’t proved that they can generate a high enough shopping basket to make online grocery pay, so this seems a huge leap in the dark for them,” independent retail analyst Nick Bubb wrote in a note to clients.
The deal combines M&S’s branded food and beverage range, currently sold in the company’s food halls and convenience stores, with Ocado’s own-label and third-party branded products. It allows Ocado to focus on its business that licenses automated warehouse technology to super- markets, which has grown faster than the UK grocery operation.
“This is a transformative deal in the UK grocery market which brings together two iconic and much loved British retail businesses,” Ocado chief executive Tim Steiner said.
UK stores have been struggling to compete with the rise of online shopping, as the Brexit-induced weakness of the pound squeezes profit margins, contributing to the growth of empty shopfronts throughout the country’s town and city centres.
Discounters Lidl and Aldi are adding to the pressure, prompting market leader Tesco to create its own cut-price store brand and Sainsbury to seek a purchase of Walmart’s Asda that now faces growing regulatory opposition. The M&S venture with Ocado would have had sales of £1.5bn and earnings before interest, taxes, depreciation, and amortisation of £34.2m for the 52 weeks to December 2, the companies said.
Waitrose products, which have been delivered by Ocado for about a decade, will become exclusively available via the grocer’s own e-commerce service and in its stores when the partnership ends in September 2020.
Waitrose aims to double its online platform within five years and will be able to service thousands more online customers from the end of this year, it said.
It also plans to build a second fulfillment center to support growing order volumes in London. M&S chose to raise equity for the deal as its net debt stands at £1.8bn. Bondholders were cheered by the decision. However, M&S plans to cut its dividend to shareholders by 40%.
Ocado used a breakup clause in its contract with Waitrose to walk away from that contract before the expiry date in a year and a half. The agreement with M&S is the latest for Ocado, which has struck technology licensing deals with US grocer Kroger, France’s Casino Guichard-Perrachon, and others.
M&S has been slower to move into home delivery than other British grocers. Its food business has waned as of late, following a slump in the clothing arm, pushing management into a cost-cutting initiative that’s scheduled to eliminate 100 stores in the next three years.
The Ocado partnership could enable it to reach a wider customer base and offer more product lines in stores as well as online. “It’s a game-changing step forward in shaping the future of M&S and becoming a digital-first retailer, with at least a third of the business online,” CEO Steve Rowe said.
Meanwhile, shares in Ted Baker, the fashion chain rocked by an investigation of its founder’s behaviour, plunged after it said profit for the year was hurt by adverse currency movements and other factors.
Pre-tax profit for the year ended January 26 will now be about £63m. The shares fell up to 17%.