Waitrose MD Mark Price is the self-styled “chubby grocer”, one of the more affable figures of UK food retail. However, Price’s comments over the weekend about Ocado’s talks over a tie-up with Morrisons show a serious side the online specialist would do well to note.
Price took to the pages of The Sunday Telegraph to express Waitrose’s concern about the discussions between long-time partner Ocado and rival grocer Morrisons.
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Since March, Ocado has been in talks that could potentially see it licence intellectual property to Morrisons, which has yet to launch an online food service but is committed to dipping its toe in the fast-growing world of Internet retailing by the end of its current financial year.
The ties between Ocado and Waitrose date back to the very launch of the online specialist. Waitrose’s parent John Lewis Partnership was an early investor in Ocado. It is no longer a shareholder but Ocado still has Waitrose own-label products in the range of lines it offers; Waitrose’s current deal with Ocado, which was renewed in 2010, runs until 2020.
In 2011, Waitrose launched is own online delivery service for customers within the M25 – the motorway that circles London – and became a rival to Ocado in what is perhaps the most lucrative market for online retailing in the UK.
However, Price is taking Ocado’s talks with Morrisons seriously and has said Waitrose will consult its lawyers if the two sides reach a deal. “If a contract is signed between Morrisons and Ocado we will want our legal team to examine it immediately to ensure there are no breaches of the contract,” Price told the Sunday newspaper. “I would never knowingly sign a contract with Ocado that agreed to them working with another retail competitor.”
For its part, Ocado insists any deal with Morrisons would be “complementary” to its current agreement with Waitrose. The talks, it notes, do not include any discussions over Morrisons buying a stake in Ocado. “Any such agreement would be complementary to Ocado’s existing partnership with Waitrose, which would be unaffected by any potential agreement with Morrison – product would continue to be sourced with Waitrose, and Ocado customers would continue to buy exclusively from the existing Ocado, Waitrose and branded ranges,” it said ahead of its AGM on Friday.
All three companies were refusing to comment further this morning. Waitrose stood by Price’s comments to The Sunday Telegraph, Ocado referred to its statement before its Friday shareholders meeting and Morrisons did not want to be drawn on the report.
However, it is plain Waitrose are frustrated to see Ocado in talks with one of its rivals, even if the online retailer argues any deal would not hurt the pre-existing agreement between the old partners. The UK online channel is one of the fastest-growing parts of the country’s grocery sector and Waitrose, which is enjoying bumper online sales, would be unlikely to want Ocado to give a rival a helping hand with its own online ambitions.
The current deal between Waitrose and Ocado, which runs until 2020, has a break clause in 2017. Waitrose would not comment on whether the discussions between Ocado and Morrisons made it more likely it would activate the clause but there is a feeling in the City the talks may mean the deal ends three years early. According to The Sunday Telegraph, the contract between Waitrose and Ocado names the retailers the digital retailer cannot deliver for – one of those is Morrisons.
“Ocado may have irreparably polluted a commercial relationship upon which it is dependent and it must lead to a greater chance of a break in 2017 in our view,” Shore Capital analyst Clive Black said in a note issued to clients today. “We believe that Ocado is playing with fire in speaking to another British supermarket group, as it tries to utilise its substantially greater fulfilment capacity, because the group’s umbilical cord to Waitrose may be cut sooner than we anticipated and Ocado cannot exist as a commercial entity without Waitrose in our view.”
For its part, Ocado would no doubt argue it is entitled to look at how to grow its business, especially as it battles a formidable competitor in and around London in the shape of Waitrose itself. Sir Stuart Rose, the former Marks and Spencer boss who is now Ocado chairman, has spoken of wanting to “monetise” the firm’s intellectual property. In an interview with The Telegraph earlier this month, Sir Stuart and his predecessor as chairman Lord Grade said a deal could allow Morrisons to use Ocado’s technology to deliver products in Morrisons-liveried vans run by the online retailer.
However, there is some scepticism about the potential of such moves. On Friday, Panmure Gordon analyst Philip Dorgan questioned Ocado’s technology and its ability to secure more third-party business in the vein of a potential Morrisons deal. “While Ocado is very good at many things, we don’t think that its technology is easily transferred to other product categories, or that it will have a lot of third party takers after Morrison if, indeed, the latter does sign on the dotted line,” he said.
It is, of course, too early to say what the exact nature of an agreement between Morrisons and Ocado could be, if any. But Price’s comments suggest the prospect of Morrisons and Waitrose simultaneously using Ocado’s fulfillment centres is remote. Shares in Ocado, which have jumped in recent months were down over 6% at 210.6p this afternoon.
“[Ocado] is totally dependent upon Waitrose. Put another way, Ocado could not exist for long without Waitrose. So, the chance of a much more limited if any agreement with Morrisons must be high,” Black, who estimates Waitrose accounts for up to 80% of Ocado’s sales, said. “Additionally, Waitrose now has Ocado firmly in its sights as a competitor; something that Mr. [Tim] Steiner [Ocado CEO] & Co, must be worried about because the John Lewis food business is the real deal in grocery, not a hyped up techno-whizz kid with questionable commercial substance.”
