UK grocer Morrisons this morning (17 May) confirmed that, after months of talks, it will launch an online food service through a venture with digital specialist Ocado.
A 25-year deal will see Morrisons buy an Ocado fulfillment centre in the Midlands and licence the online retailer’s technology.
The UK’s fourth-largest grocer, which has lagged its rivals in offering a home delivery service, expects to launch into the fast-growing online channel in January.
The talks between Morrisons and Ocado, first revealed in March, have proved controversial due to the online specialist’s existing relationship with another UK grocer, Waitrose.
Announcing the deal, the chief executives of Morrisons and Ocado talked up the benefits of the agreement, which led to shares in the retailers climbing in early trading.
“From a standing start, Morrisons will be competing in the fast growing on-line channel by the end of this year with a really compelling proposition. The customer gets our affordable fresh food delivered by Ocado’s state of the art distribution system,” Morrisons CEO Dalton Philips said.
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Morrisons will pay up to GBP170m for Ocado’s fulfillment centre in Dordon under a sale-and-leaseback deal. The retailer will spend another GBP46m expanding the site. The two sides said they could look at building more centres in the future. The agreement will also see Ocado receive a share of the EBIT generated by morrisons.com.
Ocado, which has attracted criticism from some City analysts over its financial performance, saw its shares jump more than 40% after the announcement.
Chief executive Tim Steiner said: “We see Morrisons decision to adopt our model to drive its online launch as a further endorsement of our technological and logistical excellence. This validation should support the internationalisation of our model as well as the growth of our UK business by increased market use of our operating model, enhancing capital efficiency and improving returns.”
At the weekend, Mark Price, the MD of Waitrose, expressed concern over the prospect of a deal between Morrisons and Ocado.
“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 Telegraph. “I would never knowingly sign a contract with Ocado that agreed to them working with another retail competitor.”
Waitrose has a long relationship with Ocado. Its parent John Lewis Partnership was an early investor in the online retailer. John Lewis is no longer a shareholer but Ocado still has Waitrose own-label products in the range of lines it offers. However, Waitrose launched its own home delivery service for customers within the M25 – the motorway that circles London – in 2011.
Steiner insisted the deal with Morrisons would not affect Ocado’s existing partnership with Waitrose.
“Our customers will see no change to the service they receive from Ocado as a result of this agreement. We will continue to source products under our long term agreement with Waitrose, and our customers will continue to benefit from the existing high levels of service, wide range of products and competitive prices that they currently enjoy,” he said.
Click here for more coverage of the Morrisons / Ocado deal, including comment from both companies’ chief executives on the agreement.