Ocado and Marks & Spencer have announced the creation of a joint venture, in a move which the companies say will transform online grocery shopping.
M&S is set to acquire 50% of Ocado’s UK retail business for up to £750 million as part of the deal.
The JV will trade as Ocado.com but will stock M&S-branded products, and benefit from access to the retailer’s database of 12 million M&S food shoppers.
It spells the end of Ocado’s long-running partnership with Waitrose, which had been coming up for renewal this week.
Ocado said ending the relationship would mean it no longer needs to pay sourcing fees to Waitrose, which were more than £15 million in 2018.
Following the termination of the agreement, it is expected that the new venture will be able to launch by September 2020 at the latest.
M&S is to issue new shares in a bid to raise up to £600 million to finance the deal.
The high street retailer predicts potential cost savings of up to £70 million a year to be achieved due to increased buying scale, conversion of customers and joint marketing.
M&S boss Steve Rowe said: “I have always believed that M&S Food could and should be online.
“Combining the strength of our food offer with leading online and delivery capability is a compelling proposition to drive long-term growth.
“Our investment in a fully aligned joint venture with Ocado accelerates our food strategy as it enables us to take our food online in an immediately profitable, scalable and sustainable way.”
Tim Steiner, Ocado’s chief executive, said: “We are delighted that our UK retail business will become a joint venture with M&S. This is a transformative moment in the UK retail sector with the combination of two iconic and much-loved retail brands set to provide an unrivalled online grocery offer.”
Mr Rowe said the deal would give M&S greater buying power, meaning potentially lower prices for its customers and even the possibility of Ocado-branded products being stocked in stores.
Shares in Ocado were 4% higher on Wednesday.
But M&S shares were down 7.5% as investors digested the news of the hefty rights issue and a 40% dividend cut to finance the deal.
Mr Steiner denied that Ocado was getting a better deal than its partner, saying: “It’s an absolute win-win when you think of the synergies that we bring to each other’s businesses.”
Neil Wilson, of Markets.com, said there was a risk that customers used to Waitrose products would ditch Ocado in favour of the supermarket’s in-house delivery service.
He added that M&S’s move was “certainly bold and it gets M&S in people’s minds for online groceries at last but it just smacks of paying too much and acting too late”.
Waitrose responded to Wednesday’s announcement by saying it will add an additional fulfilment centre in London as it takes its delivery service in-house.
Rob Collins, MD of Waitrose & Partners, said: “We have strengthened our own online business significantly and said last summer that we will double Waitrose.com within five years. Today’s announcement will be a major part of achieving this and in future Waitrose.com and our shops will be the exclusive places in the UK to buy Waitrose & Partners products.
“Waitrose.com sales are growing at 14.2%, well ahead of the market, and customer satisfaction scores for both fulfilment and the website are showing sustained and significant increases too.”