Morrisons renegotiates Ocado tie-up in search for ‘profitable’ online offer

MORRISONS has re-negotiated parts of its original contract with delivery giant Ocado as it pushes ahead to achieve profitable growth online and expand its geographical reach.

The supermarket chain said it has finalised an agreement with Ocado that will enable Morrisons.com to “grow profitably across Britain” and improve its online and home delivery shopping services.

Analysts had predicted that the deal with Ocado would be revised under the leadership of chief executive David Potts, which sees Morrisons’ groceries being delivered to Ocado warehouses, then out to customers. It follows a deal struck with online retail giant Amazon at the start of the year.

It said the main changes were that the restriction on store pick has been lifted, the profit share agreement will be cancelled and the Research & Development (R&D) fee will be reduced.

Bradford-based Morrisons is going to take some of the space at Ocado’s latest “customer fulfilment centre” which is under construction in Erith in the South, which it says will allow millions more customers to shop with Morrisons.com.

The arrangement has “significantly” lower upfront capital costs than the original operating agreement and includes an option to break after five years.

The Erith fulfillment centre is due to go-live at the end of 2017 and is expected to have capacity of 210,000 orders per week.

Ocado will develop a store pick solution for Morrisons.com and prior restrictions will be lifted, enabling Morrisons to fulfil online orders via store pick anywhere in Britain, including all areas not currently covered by Morrisons.com.

Once the store pick model becomes operational, Morrisons contractual obligation to share a proportion of its future online profits with Ocado will end. At this point the exclusivity restrictions on Ocado will also be reduced, although it will still be prohibited from serving certain grocery retailers.

Once Morrisons.com is operational from Erith, Morrisons will pay Ocado a reduced annual R&D fee.

Morrisons said: “Our aim has always been to achieve profitable growth online. The extension of our online offer nationwide, through our investments in Erith and store pick, means that the break-even point for Morrisons.com will be slightly later than originally planned when the business operated solely from the Dordon CFC. In future, we expect the annual Morrisons.com EBIT loss to continue to reduce each year and to be a key component of the £50m-£100m incremental profit opportunity we announced at our preliminary results in March 2016. Our capital expenditure guidance of c.£450m for 2016/17 and a sustainable range of £400m-£450m per annum in future years is unchanged.”

David Potts, chief executive, 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.”

Morrisons and Ocado started working together in 2013, enabling Morrisons to launch its online grocery business, years later than its three bigger rivals Tesco, Sainsbury’s and Asda.