Ocado may lose customer loyalty after M&S deal, poll suggests | Business

Ocado risks a customer exodus as a result of its new tie-up with Marks & Spencer after a straw poll by analysts suggested shoppers were loyal to Waitrose and did not see M&S products as an “adequate” replacement.

On Friday a note by HSBC’s influential retail analyst Dave McCarthy revealed the opinions of 250 Ocado shoppers on the deal, views which he described as “worrying” for the two listed companies.

Just over a fifth said they would not shop with Ocado if Waitrose products were not available while a “meaningful proportion” said “their loyalty is to Waitrose and that M&S is not an adequate replacement”.

M&S is buying half of Ocado’s UK retail business for £750m in a deal that will see its food replace the Waitrose products on the website in 2020. Ocado has played down the risk of losses to its 720,000-strong customer base after the brands switch over but McCarthy warned heavy customer losses would hit the bottom line.

“The profit implications could be severe due to operational gearing and low profits,” wrote McCarthy, if the views of the small sample turned out to representative of the wider Ocado customer base. “If the joint venture lost sales … losses could rise sharply.”

Waitrose says roughly 40% of Ocado shoppers visit its stores, with the HSBC survey finding that buying its products were more important to the respondents than Ocado’s.

Waitrose’s supply deal with Ocado was worth about £15m a year in fee income for the employee-owned grocer and it will have to work hard to convince shoppers to switch to its own delivery service. Waitrose.com fills shoppers’ orders from its stores’ shelves, as well as a fulfilment centre in Coulsdon, south London.

But Ocado is not wasting any time either. On Friday it wrote to customers trumpeting the new M&S deal – promising the “only change you’ll notice” come September 2020 is that “you’ll be able to buy thousands of M&S own-label groceries from Ocado”. “Together with M&S we will develop new and exciting lines, resulting in an even bigger range,” it added.

Tim Steiner, Ocado chief executive and Steve Rowe, M&S chief executive

Tim Steiner, Ocado chief executive (L) and Steve Rowe, M&S chief executive (R) announced the creation of a joint venture in February under which M&S will acquire a 50% share of Ocado’s UK retail business. Photograph: REX/Shutterstock

In the wake of last month’s deal, analysts suggested M&S was overpaying for the Ocado stake which is being financed via a £600m rights issue and a cut to its dividend. M&S boss Steve Rowe has insisted the deal was a good one for the retailer which had previously struggled to make the economics of selling its upmarket food hall ranges online. “This is not about the short term,” he said. “This is about the transformation of M&S [and] the transformation of online grocery shopping in the UK.”

“Ocado has done a good deal, as its lack of buying power … and its reliance on Waitrose was a major strategic threat,” concludes McCarthy. “Of course consumers do not always do what they say they will do when faced with future events, and M&S will expand its range, but our survey suggests the challenge for the joint venture may be bigger than management expects.”

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