The online battle for retailers

By Alex Brummer, February 17, 2011

When new chief executives, Marc Bolland and Dalton Philips recently took control at Marks & Spencer and grocer Wm Morrison, respectively, both pledged to play catch-up on internet sales. Whereas market leader Tesco and Waitrose-partner Ocado have made a good fist of having success online and developed strong brands, others have lagged behind.

So, when M&S boss Bolland (previously at Morrison) snagged Tesco star Laura Wade-Gery to become executive director, in charge of e-commerce, it was viewed as a major coup. Oxford-educated Wade-Gery is regarded as the brains behind Tesco Direct, which last year experienced a 16 per cent increase in online sales to £1.2 billion. She had been viewed by some as a potential successor to Tesco legend Sir Terry Leahy. Instead, Tesco preferred Phil Clarke, its international chief.

Wade-Gery says her future lies at M&S, but when it comes to online, Britain's favourite retailer has a lot to learn. Its online propositions suffered almost a decade of lost opportunities because of management turmoil. Analysts have described M&S's website as "lucklustre" and "underwhelming".

Even its much trumpeted flower service appears incapable of making deliveries on time to the right place, as my own family discovered recently.

Another group struggling with web experience is Wm Morrison. Having made the successful trip from Bradford to the South through its Safeway acquisition, under the command of Bolland, its new chief executive Dalton Philips is "determined to make Morrison better than ever." That plan, as Philips told me, includes taking the supermarket group online.

One of Philips' initial ideas was to buy a ready-made grocery internet operation. Ocado, founded by three Goldman Sachs executives and headed by old Haberdasher Tim Steiner, looked like the likely candidate. But the company was already on a fast track to flotation and had signed up to a contractual and supply agreement with John Lewis-offshoot, Waitrose. So the opportunity was lost and Ocado went for an initial public offering.

Ocado's short history as a publicly quoted company has been somewhat eventful. Floated by Goldman Sachs at 180 pence last July, the shares plunged by one-third in the first three months of trading, with mixed broker reports. Clive Black, analyst at Shore Capital, was particularly pessimistic, regarding the shares as all but worthless.

Despite the initially negative response - and Steiner's claims of a City whispering campaign - Ocado has met the sales goals it promised at the time of the float. In early February this year it reported a 14 per cent increase and posted a modest £300,000 profit in the final quarter (while making losses of £12.2m on the year).

But the share price soared on the final quarter data, reaching an all-time high of 285 pence. This provided an opportunity a week ago for one of its founder shareholders - the John Lewis pension fund - to offload all of its 10.4 per cent stake at a nice profit.

Nevertheless, the John Lewis pension fund sale -conducted by Goldman - has raised secondary questions. The bedrock of Ocado is its 10-year supply contract from Waitrose, which also provides most of its affluent customer base. But there are concerns within John Lewis and Waitrose over the contract. Waitrose finds it difficult that its online business uses different IT systems and coding to those at parent John Lewis. This has become particularly important as Waitrose has moved into non-foods where it competes with its parent. Meanwhile, Waitrose has been experimenting with its own delivery services.

It is not yet clear which route Marks & Spencer will pursue in developing its online services under Wade-Gery. But given the space and access problems at many M&S stores - which are mainly high street rather than edge of town - a warehouse approach looks most likely.

For M&S, Wm Morrison and others playing catch up with Tesco and Ocado, online is now the name of the game. M&S boss Bolland has set a task of reaching £1 billion worth of internet sales but some analysts believe it should be more ambitious and turn its website into a primary sales feature rather than backup - and aim for £1.5 billion.

What is without doubt is that online looks to be the next really big frontier in British retailing.

Alex Brummer is City Editor of the Daily Mail

Last updated: 11:02am, February 17 2011