Ocado in M&S tie-up talks

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Online grocer Ocado is in talks to modernise M&S food distribution, as the British retail stalwart looks to turn around its ailing fortunes.

The potential tie-up would see Ocado provide M&S with its innovative distribution centres, delivery vans and lorries but could put an end to its 20 year relationship with Waitrose, which is up for renewal next year. While Waitrose customers would still be able to rely on delivery options from Waitrose.com, any potential deal would bolster an M&S food delivery business still very much in its infancy. Relations between Ocado and Waitrose have grown increasingly fraught since the online firm helped launch Wm Morrison’s home shopping service in 2013, and it is unclear whether Waitrose would be happy with yet another UK retail partner in the stable.

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Regardless, the discussions between the new kid on the block and the traditional face of British retailing show just how important it is to keep innovating - as M&S have found, sooner or later the old ways start to show their age.

However, I think the most interesting part of these preliminary talks is the direction of the Ocado business, which could end the year providing services for Wm Morrison and M&S as well as a host of international firms like France’s Groupe Casino and US giant Kroger.

This will come as no surprise to investors interested in the company, as trading updates have clearly outlined the firm’s desire to focus on providing its proprietary distribution technology rather than becoming the next face of grocery retail.

Scratch the surface of Ocado’s business model and you’ll find all the characteristics of a tech company that just happens to be involved in getting the weekly shop to your door. Their customer fulfilment centres incorporate gaming technology to visualise warehouses in 3D, allowing analysts to spot problems like traffic jams before they happen, and their work in robotic order fulfilment is a sight to behold - have a look online. Without any superstores to take care of, the company has been able to leapfrog issues like underperforming sites and skip straight to a nimble online offering.

A key element to all of this is that the software powering the whole operation is written in-house. This is where Ocado sees the opportunity.

Grocer growth

It’s one thing for traditional retailers to have a fleet of home delivery vans backing up orders on a website but when it comes to delving into smart warehouses using machine learning and artificial intelligence they may need to go shopping themselves. This is where M&S finds itself today, having neglected its own delivery capabilities - but it isn’t alone.

A significant number of online retailers still do not have adequate online portals and Ocado hopes it will be quicker and easier for supermarkets to buy their technology and warehouse expertise rather than try to develop it themselves. Full year results out next week will give an indication as to how this plan is playing out.

Even if the more established players downed tools and looked at creating such a system, it’s unlikely they would catch Ocado, which opened its latest customer fulfilment centre last year, designed to be the largest automated warehouse for online grocery retail in the world.

With the tech roll-out firmly at the forefront of the company’s intentions, it’s unlikely this is the last we’ll hear of deals with big retailers. And the ones who already incorporate Ocado’s technology might just have to deal with it, or invent their own.

More on Ocado

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