Morrisons CEO Dalton Philips has said the UK grocer’s “strong fresh food proposition” will help it meet its target to have a profitable online business four years after its launch in January.
The retailer, the last of the UK’s four largest grocers to move online, plans to start home deliveries in four months via a technology and distribution deal with Internet specialist Ocado.
Speaking to reporters yesterday after Morrisons reported its half-year results, Philips said the retailer could offer consumers something that was not available on the market.
“You’ve got a combination of [Ocado’s] technology [while] we can push a lot of fresh food into our manufacturing facilities. The combination will be a strong fresh food proposition, delivered well. It’s not being offered out there in the market today,” he said. “Customers shopping online buy fewer fresh products than when they shop in-store. By applying our craft skills and manufacturing expertise we are confident we can change that. The capability for our customers to order their steak cut to a specific thickness or their fish fillieted in a particular manner, just as they can in our supermarkets, is being developed.”
Food retailers that currenly operate online have found it difficult to make those operations profitable. Morrisons, however, is confident it can make its target. “The maths add up,” Philips said.
Finance director Trevor Strain said the use of Ocado’s assets makes Morrisons’ online foray less risky. “Leveraging the technology and the operating platform massively derisks our operating model and with it the cost structure of the dot.com business,” he said.
Morrisons would not reveal where in the UK it would first offer home deliveries for competitive reasons. However, Philips insisted the retailer was targeting the GBP500m a year its customers spent at competitors that already offer an online service.
“It’s going to be very much a defence and offense play. Our headwind is approximately GBP500m a year of sales that our customers today spend online for various reasons. There’s a big opportunity to go for,” he said. “We will shore up parts of our heartland and we will attack where there is white space for us. We don’t want to say specifically where that is for obvious reasons. Having said that we have bought GBP500m of capacity with our first customer fulfillment centre in Dordon and we intend to use it.”
Announcing its results, Morrisons revealed it had spent GBP27m when it had investigated setting up its own online business before it had struck the 25-year deal with Ocado.
Philips said money had been written off. “It shows the scale of the investment needed to get in online. It’s programme management, technology, getting that programme up and running. If it had been any less, you might have challenged me: ‘Were you really serious? Did you really have an organic plan?’ We absolutely had an organic plan but in the end what we are doing with Ocado we feel is the right thing for our customers and our shareholders.”
Morrisons’ initial moves to look at how to develop and online business included the acquisition of a stake in US firm FreshDirect. The retailer plans to keep its stake in the business, which Philips said is “doing some really innovative stuff” on fresh food.
“We still talk regularly with FreshDirect. I sit on the board of FreshDirect. What they do in terms of fresh proposition, how they communicate, how they advertise, how they source product, the ratings they put on the websites, all the multimedia stuff they do, is really, really good stuff,” Philips said. “In bricks-and-mortar, when someone launches a new concept, we go in and photograph it. Online is really hard. How do you get in? It’s wonderful to have a relationship with somebody in North America that we’re with in the inside that we can take those learnings back.”
Shares in Morrisons rose yesterday despite the retailer posting lower half-year sales and profits. The retailer’s stock was boosted by an increase in the dividend and a move to cut its capex budget for its next financial year. Morrisons plans to spend less money opening new supermarkets as it focuses on online and its convenience stores. Philips insisted “the space race” among UK grocers was “well and truly over”.