Morrisons looks set to significantly grow its online home delivery service after renegotiating its current deal with Ocado.
After entering talks earlier this year, Morrisons said it had now finalised an agreement with Ocado that will enable its online activities to grow profitably having agreed a number of changes to components of the original contract.
The main change is the lifting of a restriction on store picking, allowing Morrisons to service orders from its outlets across the UK, significantly extending the reach of its delivery network. Morrisons.com can currently offer grocery deliveries to around half of UK households, mainly in central England, via its tie-up with Ocado. However, the new arrangement will allow it reach new areas such as Scotland and the South West of England.
Ocado will develop the store pick solution for Morrisons, but once operational, a contractual obligation to share a proportion of its future online profits with Ocado will end.
The new deal will also see exclusivity restrictions on Ocado being reduced, although it will still be prohibited from serving certain grocery retailers, namely Tesco, Asda, Sainsbury, Aldi and Lidl.
As previously announced, Morrisons has agreed to take capacity in Ocado’s new Customer Fulfilment Centre (CFC) in Erith, further expanding its reach. The new arrangement has significantly lower upfront capital costs than the original operating agreement and includes an option to break after five years. Once Morrisons.com is operational from Erith in 2018, the retailer will pay Ocado a reduced annual R&D fee.
Meanwhile, in parallel with the delivery changes, Morrisons has agreed a move to grow its range of non-food items available online. The supermarket will sell thousands of non-food items from well-known brands, currently available via Ocado.
A statement from 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, added: “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.”
Back in February, Morrisons struck a supply agreement with Amazon with hundreds of its products now available via the new AmazonFresh service.
- All the signs of a strengthening negotiation stance with Ocado…
- …and a renewed emphasis on online (and its financing)
- …all pointing the way to tougher, more financially-based collaboration with supplier-partners…