What’s going on here?
M&S has agreed to a £750 million food delivery deal with Ocado.
What does this mean?
M&S has decided to take its food business online for the first time as it buys a 50% stake in Ocado (an online supermarket delivery service) for £750 million. Ocado will start making deliveries for M&S in September 2020, after its contract with Waitrose runs out. The move to online deliveries reflects the shifts in consumers’ demands. When considering changes in the retail market, it is clear that online shopping is starting to take over the high street. M&S has previously been reluctant to provide an online delivery service for its groceries, partly due to its small range of products. This is compounded by the low basket cost, with the average spend amounting to only £13 a trip. This joint venture will now give M&S access to Ocado’s warehouses and delivery network. M&S joining with Ocado means it can deliver its products in a “profitable, scalable and sustainable way”.
What’s the big picture effect?
Critics fear that M&S has overpaid in this deal. After the supermarket released the final news, M&S’s shares fell 12% while Ocado’s rose 3%. So what caused this drop in share value? Well, it came right after the company announced a £600 million rights issue and a 40% cut in its dividend payout. A rights issue is when existing shareholders are offered the chance to buy new shares at a discounted price. A dividend is a sum of money paid to shareholders as their share of its profits. Both events were a contributing factor in the drop in M&S’s share value.
The way the company has funded this deal has been described as an “extravagant use of shareholders’ money” as the deal is seen as a risk. The majority of the funds were raised from the company’s rights issue. A rights issue can negatively affect the company’s share price as it makes its shares less attractive to investors. This happens because the value of shares become diluted (meaning that a company’s profit is divided between more new shares).
M&S and its shareholders will have to wait and see if this risk pays off. But, in an increasingly digital world, it must be considered a positive move for the supermarket to go online.
Report written by Elizabeth M.
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