Morrisons has just renegotiated its deal with online grocer Ocado as the supermarket attempts to grow a profitable ecommerce business.
The supermarket giant, which initially inked a tie-up with Ocado in 2013, has agreed to take space in the etailer’s new fulfilment centre in Erith, Surrey, which is due to open in 2018, while it will also launch store picking in more remote locations to expand its online offer nationwide.
As a result, the financial terms of the tie-up have also been altered, while Morrisons has also agreed to allow Ocado to speak to other British retailers about penning similar deals.
After Ocado boss Tim Steiner insisted to Retail Week that the amended deal constitutes “a win-win outcome for both parties”, we take a look at the pros and cons of the new-look contract for both businesses.
Sharing warehouse capacity
A key part of the new contract will see Morrisons take space in Ocado’s fourth customer fulfilment centre, in Erith, which is currently under construction.
The site will ultimately have the capacity to fulfil more than 200,000 orders per week, with Morrisons entitled to around 30% of that space as part of the agreement.
Morrisons acquired Ocado’s Dordon facility on a sale and leaseback basis as part of the original deal three years ago, shelling out more than £200m to buy the warehouse, mechanical equipment, a licence and integration fee, as well as expanding the site to accommodate its range and integrate its systems.
As far as Ocado is concerned, it will receive help in footing the bill for its latest customer fulfilment centre, while also ensuring that the warehouse will remain operating as close to capacity as possible
The extended terms of the partnership will provide Morrisons with additional warehouse capacity at a fraction of that cost, since the supermarket chain will pay just 30% of the initial building costs and will stump up “a similar percentage share” of ongoing costs, such as business rates.
However, the supermarket chain is tied into the deal for 30 years, although there is a five-year break clause.
Should it opt to terminate the Erith tie-up before the 10th anniversary of launch, Morrisons will have to pay Ocado an undisclosed sum in compensation.
As far as Ocado is concerned, it will receive help in footing the bill for its latest customer fulfilment centre, while also ensuring that the warehouse will remain operating as close to capacity as possible.
Given that Ocado only shipped 250,000 orders in a week for the first time earlier this year, it will be a number of years before it is single-handedly fulfilling 200,000 orders from Erith alone – particularly with Amazon Fresh bidding to encroach into its heartland in London.
Rather than operating well under capacity, it makes sense for Ocado to share its space.
Morrisons is opening up its online offer nationwide after the link-up with Ocado was expanded into include store picking for the first time.
Under the agreement, the grocer’s staff will do the physical shopping of goods in stores to be delivered to customers’ homes, but Ocado will license and maintain the software necessary for it to fulfil those orders.
By extending the partnership in this way, Morrisons is again eliminating costs – those associated with researching and developing its own software – while also saving time by moving to the store-picking model immediately.
“A new management team has come in [to Morrisons] that was originally a little bit sceptical about the whole thing, but is now expanding with us, taking on more capacity and will be growing their business with us. It’s a significant validation of the OSP strategy, so from our perspective that’s great.”
Tim Steiner, Ocado
It also means the grocer can finally offer home deliveries to online shoppers in more remote locations such as Scotland and Wales, where it does not currently have warehouse space.
But by effectively outsourcing the software required to pick online deliveries from stores, Morrisons will have less control over the system should it encounter any problems with the Ocado Smart Platform.
For Ocado, it provides validation of their business model to provide its platform to third-party retailers.
Steiner tells Retail Week: “A new management team has come in [to Morrisons] that was originally a little bit sceptical about the whole thing, but is now expanding with us, taking on more capacity and will be growing their business with us.
“It’s a significant validation of the OSP strategy, so from our perspective that’s great.”
Given Ocado’s struggle in securing a tie-up with an overseas retailer, the additional endorsement from Morrisons could give it a boost in ongoing talks with prospective partners.
On this front, it appears as though Morrisons has reneged and handed back a fair degree of wiggle room for Ocado to speak to other UK retailers.
Aside from Tesco, Sainsbury’s, Asda, Aldi and Lidl, Ocado is now free to offer its technology and logistics to British grocers to help them grow an online business – in exactly the same way it has done with Morrisons and Waitrose.
An online food launch from either of those businesses, or indeed any other grocery player, could have a knock on effect on Morrisons’ already under-pressure market share
But an online food launch from either of those businesses, or indeed any other grocery player, could have a knock on effect on Morrisons’ already under-pressure market share.
However, it seems Morrisons chief executive David Potts drove something of a hard bargain – Steiner revealed that he wanted even more freedom to secure other grocers, perhaps hinting that he would have liked to have worked alongside the discounters.
“The Morrisons deal limited who we could talk to in the UK. They have opened that up slightly, not completely, but they have opened it up slightly and that enables us to talk to retailers who we couldn’t have done beforehand,” he tells Retail Week.
“I want to build a viable business, which means I need each customer to be happy. In this case, we’ve managed to get some release of exclusivity, but I’d have obviously preferred to have a greater release of it.”