Morrisons fended off stiff competition to win a wholesale supply contract with McColl’s, but now the hard work really begins for the supermarket giant.

There’s no doubt that Morrisons pulled off a significant coup by trumping more traditional wholesalers and winning the retender process to supply McColl’s 1,650 locations.

The convenience and newsagent group prides itself on being one the biggest retail customers in the market for suppliers, but big business for Morrisons doesn’t necessarily mean big profit.

Morris mc colls0708

Morris mc colls0708

McColl’s current suppliers Nisa and Palmer & Harvey both hinted that losing their respective contracts could, in fact, turn out to be blessings in disguise.

Nisa’s boss Nick Read admitted he was “disappointed” to lose the supply agreement, but pointed out that it was only “a low margin contract.”

Palmer & Harvey painted an even bleaker picture, suggesting its supply deal with McColl’s had been “loss-making for some time.”

Potential concerns

McColl’s share price has rallied from 230p to more than 260p as the City digests the prospect of increasing the quality of its fresh, frozen and ambient produce by harnessing Morrisons’ vertically integrated model.

Morrisons’ shares, on the other hand, have risen to a much slower degree, perhaps suggesting a degree of caution from investors about the benefits the six-year deal will bring for the grocer, which expects it to be profitable.

“Perhaps some teething problems should be expected as Morrisons gets to grips with the challenges of fulfilling its first wholesale deal of this nature”

Morrisons plans to distribute goods to McColl’s stores through its existing partner DHL, who also do the same for Nisa.

That sounds sensible. McColl’s stores, in the main, are not in the same mould as the Tesco Expresses, Sainsbury’s Locals and Co-ops of this world.

Barring the 298 shops McColl’s acquired from the latter, storage and shelf space are both at a premium, meaning drops to stores are required on an almost daily basis.

That requires distribution capabilities that can handle such a challenge, and DHL brings experience.

However, perhaps some teething problems should be expected as Morrisons gets to grips with the challenges of fulfilling its first wholesale deal of this nature, which it said would be profitable in the first year.

Something else up its sleeve?

Given such effort to win a tender that apparently delivered Nisa and Palmer & Harvey little to no financial reward, could it be that Morrisons actually has a much bigger deal up its sleeve?

After all, McColl’s is in the process of converting its estate into more traditional, “premium” convenience stores – a sector in which Morrisons has had no presence since selling its M Local business in September 2015.

If it is mulling an acquisition, what better method of data reconnaissance than supplying McColl’s stores first-hand?

Admittedly, Morrisons has focused on capital-light methods of growth under David Potts, as the former Tesco executive bids to return the grocer to former glories.

But as big four rivals Tesco and Sainsbury’s hit the acquisition trail, a similar move from Morrisons would be far from a bolt from the blue.