Morrisons chief executive Dalton Philips today (17 May) claimed the UK grocer’s venture to launch into the online channel with Ocado was a “great deal” for shareholders and consumers.
After months of talks, Morrisons this morning announced a deal that will see it start delivering groceries online in January through a distribution and technology deal with Ocado.
The UK’s fourth-largest grocer has lagged all its major rivals in moving into the country’s fast-growing online channel.
Industry watchers long questioned Morrisons’ absence from the online market. However, Philips defended Morrisons’ hesitancy, insisting the retailer wanted to be sure it could “do it right” before moving into the channel.
In March, Morrisons finally said it would launch an online service but claimed its plans were not “dependent” on the discussions with Ocado. Today, the two sides announced what Philips called a “compelling” deal for Morrisons.
Since the talks with Ocado were made public, some in the City have questioned why Morrisons would team up with another company and not enter the channel alone.
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Speaking after the deal was announced this morning, Philips said teaming up with Ocado was less risky.
“There’s less risk, more certainty doing it with them. There’s no black hole of costs. They’ve got the capability. And the economics of this are very strong. To get to an EBIT level in four years is, for our shareholders, very strong,” Philips insisted.
Morrisons has forecast the online business will generate a “positive EBIT” in its 2017/18 financial year. Under the deal, Ocado will receive a share of profits.
The 25-year agreement will see Morrisons harness what it called Ocado’s “market-leading” technology, logistics and delivery. It will buy Ocado’s fulfilment centre in Dordon in the Midlands. Morrisons will pay service costs and contribute to R&D. Consumer orders will be delivered in Morrisons-branded vans.
“This is a long-term agreement with long-term aligned interests. It’s got all the right protections. It feels right,” Philips said.
However, Ocado has an existing partnership with another UK grocer, Waitrose. As the talks between Morrisons and Ocado were unfolding, Waitrose MD Mark Price publicly expressed concern about the possibility of a deal.
After the agreement was announced today, Waitrose said it was asking lawyers to look into the deal to “get a clear and unequivocal view of the contract” and see if it breached its own venture with Ocado.
That deal runs until 2020 but contains a break clause that Waitrose could use to walk away from the agreement in 2017. Some in the City have argued Ocado’s deal with Morrisons makes it more likely Waitrose will quit its agreement with the online firm in four years time.
Ocado CEO Tim Steiner today insisted the company’s deal with Morrisons would not affect its partnership with Waitrose.
For its part, Morrisons seemed comfortable its agreement would not have an effect on Ocado’s deal with Waitrose.
Finance director Trevor Strain said: “We haven’t got any protections [if Waitrose breaks its Ocado deal in 2017]. They are a matter for Ocado and we are looking at them as a supplier to us of technology and support services.”
He added: “The fact the Ocado board has announced it is going to recommend this transaction to its shareholders gives us confidence they think the arrangement we are entering into will not lead to any breach. We haven’t factored any of that contigency planning into our budget. We just don’t think it’s going to happen.”