Morrisons expands its delivery reach in Ocado deal
The revised deal allowed Morrisons to double its delivery area by using its own stores to pick products for delivery and will also allow the retailer to sell more non-food brands online.
Food delivery service Ocado also agreed to share its south east London-based customer fulfilment centre, which could allow “millions” more customers to shop on Morrisons.com.
Under the terms of the new deal, Ocado was bound by fewer restrictions preventing it from working with other food retailers. However, the company was still not allowed to work with Tesco, Sainsbury, Asda, Aldi or Lidl.
Morrisons expected its online business to continue making a loss in the short term, despite the new deal. Although its profits should be boosted by up to £100M in the future, the company said.
‘Millions more customers’
Morrisons’ chief executive David Potts said: “The new investments in online growth are further examples of Morrisons building a broader business and will allow millions more customers all over Britain to enjoy Morrisons’ good quality fresh food and great value for money.
“As food maker and shopkeeper, we continue to ‘follow the customer’ and move towards achieving capital light, profitable growth online.”
Ocado said in a statement: “Ocado is delighted to announce that it has concluded its agreement with Morrisons to share some of the capacity of Ocado’s customer fulfilment centre currently under construction in Erith, south east London.”
The customer fulfilment centre is due to open in 2018 and is expected to carry out more than 200,000 orders a week.
City analyst Shore Capital judged the deal was “to mutual benefit”. The analyst left its forecasts for both businesses unchanged, while upgrading its rating on Ocado from ‘sell’ to ‘hold’.
‘Sustainable economic prospect’
Shore Capital analysts Clive Black and Darren Shirley said: “We welcome this agreement as it provides a more sustainable economic prospect for Morrisons to build out its online capability in Great Britain.
“[It also provides] a lifeline to Ocado in its grocery fulfilment activity and also potentially removes a block to further collaboration in international markets, where much has been promised but nothing delivered by the company.”
The agreement made the partnership more “sustainable”, after what was a one-sided starting point in the original deal, the analyst said.
The two companies agreed an initial deal in May 2013, which saw customers receiving Morrisons’ products from the Ocado distribution system.
What Shore Capital said about the new deal
- “Protracted negotiations between Morrisons and Ocado have been concluded to mutual benefit to our minds, but most particularly in engendering the basis for a more sustainable partnership given the somewhat one-sided starting point of the original agreement, in our view.
- “All in all, we believe that Morrisons’ shareholders in particular should be quite chipper with this development.
- “We believe that the new deal further augments the self-improvement and so positive investment thesis surrounding Morrisons, whilst we also upgrade our long-standing recommendation on Ocado's shares from ‘sell’ to ‘hold’.”
