M&S and Waitrose fight it out for the shopping baskets of middle England

At the top end of the UK’s grocery market a battle is taking shape between two bastions of middle England and against the backdrop of a cost of living crisis that is affecting consumers up and down the country.

Over the past two years, according to NielsenIQ data, Marks and Spencer has gained about 0.7 percentage points of market share while Waitrose has lost a full percentage point.

Stuart Machin, M&S co-chief executive and its former head of food, said the changes to ranges, prices and stores to encourage customers to use it for more than just treats and ready meals are starting to bear fruit.

What he terms “renewal stores” — often in retail parks with lots of free car parking — “are definitely giving a full shop experience”.

But James Bailey, executive director for Waitrose at the John Lewis Partnership, said the pandemic has made the past two years so exceptional that he questioned “whether this is really the time to form hard conclusions”.

Many feel the “Ocado switchover” in September 2020 was a significant moment for competition between the two. Waitrose had supplied the online supermarket with branded groceries since its early days. But in the midst of the pandemic M&S took over that role, taking its food online for the first time in the process.

M&S at Battersea Power Station in London. Analysts have praised the retailer’s new-look food halls, product ranges and pricing strategy © Terry Leebray/Alamy

“Ocado made online easier for [Waitrose] and gave them extra volumes,” said Steve Dresser, founder of consultancy Grocery Insight. “The end of that arrangement meant they had to invest in their own capability.”

Bailey acknowledged this was a strain, even though Ocado accounted for less than 10 per cent of Waitrose sales. “We had to quintuple our [ecommerce] capacity very quickly using a store pick model, but a lot of our branches are not really designed for picking.”

But Dresser and others in the industry also praised the new-look M&S food halls, product ranges and pricing strategy. “They are absolutely nailing seasonality and their innovation is very good,” said Bryan Roberts at grocery research group IGD. “The investment in value has been superb . . . things like minced beef and whole chickens are where value perceptions are formed.”

New stores in retail parks are bringing M&S into more direct competition with Waitrose, which according to Dresser “feels like it is managing decline”. He pointed to its sometimes tired-looking stores. “It’s so frustrating because [Waitrose] have the brand, the customers and the locations.”

Waitrose is still ahead of M&S in market share and Bailey said that now demand had normalised from the pandemic and Waitrose had added online order-picking capacity, it could focus on other things.

“We want to be in a good position when the cycle turns and people start to feel more positive.”

Line chart of Per cent showing Market share

But the company faces an important constraint. As part of the employee-owned John Lewis Partnership, it has less access to external capital and its cash flows have been used to help support the department store side of the business in recent years. Last year it sold and leased back some of its freehold stores to raise money for investment.

Even in good years, bonuses paid to partners can eat up a big chunk of profits.

Previous rounds of cost-cutting have taken a toll. “What is happening now has less to do with the cost of living and more to do with what has gone on at Waitrose over the past eight or 10 years,” said one former senior employee.

The person added that a company once content to “let ideas bubble up” from its buying teams gradually moved towards a more top-down approach that resulted in less innovation and had “lost some really good people,” often to M&S.

Bailey, who joined from J Sainsbury a few months into the pandemic, acknowledged he must work with what he has. “We have to create the headroom for the right investment while still being careful,” he said.

But he added “there is no question we need to keep investing in the branch estate . . . you have to present a premium experience to charge a premium price”.

Chart showing Waitrose sales and profits

Such strategic questions come at a uniquely challenging time for the industry. Costs, including staff wages, energy as well as the groceries on the shelves, are rising faster than prices charged to consumers, putting profit margins under pressure.

Nigel Murray, managing director of upmarket grocery chain Booth’s described it as “everything and from all angles” and pointed out that some obvious remedies had reputational risk for a premium supermarket.

“It would be the easiest thing in the world” to nudge product specifications down or cut store staff, he said. “But we’re actually taking self-service checkouts out, while everyone else is putting more of them in.”

He would rather endure a short-term hit to profitability and his counterparts at large grocers broadly agree. “It is harder to recover when you have diluted what the brand stands for,” said Bailey.

Machin said inflation makes everything harder but that M&S would focus on lowering costs and looking for efficiency in sourcing. “I really don’t think we should be compromising on quality.”

All three acknowledge that while their customers are generally not, as Bailey puts it, “in the ‘heat or eat’ part of the market”, they are nevertheless looking to cut costs.

People walking past an Ocado delivery van
Waitrose supplied Ocado with branded groceries since its early days, but in the midst of the pandemic M&S took over that role, taking its food online for the first time in the process. © Mike Kemp/In Pictures via Getty Images

One bright spot is that supermarkets are benefiting from people eating out less, with Murray citing increased sales of fresh fish and fillet steaks.

And for all M&S’s current momentum, it has limitations of its own. It remains overwhelmingly an own-label retailer, which gives it a high degree of control over its products but a range that is significantly narrower than that of Waitrose and other supermarket chains.

Machin has no plans to change that, saying “there will not come a time when we run big 60,000 square foot supermarkets with all the brands”.

He adds that customers that want to combine M&S products with other branded goods can do so at Ocado.

The M&S store estate also includes hundreds of smaller Simply Food outlets, which do not carry its full range, while many of its larger stores are still in town centre spots that can be harder to get to by car.

Waitrose is also now working much more closely with John Lewis department stores in areas such as customer loyalty and shared product ranges, while the wider partnership is diversifying its sources of revenue in order to strengthen its finances.

All of which suggests the battle for Britain’s wealthier shoppers has a long way to run.

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