Morrisons pushes online with stake in US etailer FreshDirect

Morrisons finance director Richard Pennycook said: “FreshDirect has had a long journey to profitability, and has the scars on its back. We can leapfrog that pain.”

Pennycook could not say how long he expected it would take Morrisons’ online food operation - which will be launched in London within two years - to become profitable, but he said: “We will only go into this if we see good returns.”

The £32m deal will allow Morrisons to embed a team with the New York-based etailer to learn about its business. Morrisons chief executive Dalton Philips, who will join the board of FreshDirect, said: “FreshDirect is the best online food retailer in the world, and their approach to fresh food is similar to Morrisons.”

He maintained: “No one in the UK has cracked fresh food online.” He said Morrisons’ investment in FreshDirect, alongside its acquisition of Kiddicare last month, would “springboard its ecommerce offer”.

Bank of America Merrill Lynch analyst John Kershaw said Morrisons’ online approach is “novel” and “a 10% stake in FreshDirect for £32m with operational access looks “sensible”. However, he warned it is premature to see a Morrisons online food offer being scalable outside big cities for some time.

Morrisons reported pre-tax profits of £874m in the year to January 30, up from £858m the year before. Turnover climbed 7% and like-for-likes excluding petrol rose 0.9%. The grocer will also return £1bn to shareholders over the next two years and has committed to double-digit dividend growth over the next three.

Morrisons also said it has identified three trial stores for its convenience model. Operating under the M Local brand, they are on the M62 corridor and will open in July.

Philips said he was “delighted” with the progress made at its ‘lab’ store in Kirkstall, Leeds, where a revamped fresh food offer is being piloted. He said butchery sales were up 9%, deli 31% and flowers 43%.

At its Shrewsbury ‘lab’ store it is reducing SKUs to gain space for new categories. In the trial, it freed 11% of space and reduced SKUs by 1,600.

Philips said: “We’ve used the space for ready meals, kids’ clothes and more home and leisure.”

Bernstein analyst Christopher Hogbin said: “Morrisons is well positioned to grow revenue of its core business. It is making positive moves to improve the efficiency of its balance sheet and to pursue alternative growth avenues.”