Setting out a ‘manifesto’ for new chief executive Marc Bolland (pictured right) ahead of tomorrow’s preliminary results, Investec Securities analysts Katharine Wynne and David Jeary argue that a move online “cannot be deferred indefinitely”.
Given that online food shoppers are typically less price conscious, M&S is well-placed to enter the market, they suggest.
While its low average basket size would make store-based picking uncompetitive, tying up with Ocado (which picks orders from a gigantic warehouse in Hatfield) would address this issue, they claim.
“We believe M&S’s low basket size is a function of location [most of its stores are on the high street], and range [it has a very limited household/grocery offer]. But the basket size would likely rise given a broader product offer and a doorstep delivery service.”
They added: “Our recommendation is that M&S should buy itself out of the Amazon commitment [Amazon has first refusal on operating an online food e-tailing service for M&S] and potentially look to partner with Ocado.
“The Ocado model sits comfortably with that of M&S, with its depot distribution system and service levels set at a premium to the mainstream supermarket online services.”
Waitrose vs M&S
Meanwhile, if M&S does not develop a food format to take on Waitrose, its food business “will be at risk of terminal decline”, they claim. “M&S needs to go further, to become a full-range convenience store.”
Although one in four UK households shops at M&S for food, 80% of these customers are only ‘occasional’ shoppers, they point out. “That represents a pool of untapped demand that a full-range offer could reach more effectively.”
Finally, they propose a radical move to turn some large high street M&S stores into “full-range supermarkets in the Waitrose model”. While returns at many of these stores are “below average”, a large percentage are pledged to the firm’s property partnership scheme to support the pension fund deficit, they point out.
“A wholesale rationalisation of these stores is [therefore] extremely unlikely, so we believe that management has to consider a radical change for these locations, and the most logical one is to turn the prime trading footage into full-range supermarkets, compensating for lack of car parking with a home delivery service.”
The upper and lower floors could retain a “capsule convenience-led clothing offer”, while other space could be devoted to M&S Direct collection points, banking and “Post Office type facilities”, they suggest.
“These would lend themselves to the ranks of elderly customers, a growing category, who find themselves increasingly marginalised in much of the rest of the high street, and who seem to remain loyal to M&S.”
A spokesman for Ocado declined to comment on whether bosses had held talks with M&S (“we don't respond to speculation”) but confirmed that Ocado had “an exclusive arrangement with Waitrose until 2013”.