Morrisons is to push the button on online grocery after signing a deal with etailer Ocado that will enable it to launch a food ecommerce offer this year.
Morrisons said: “This industry leading customer proposition combines Morrisons’ affordable fresh food – much of it from the company’s own manufacturing facilities – with Ocado’s leading end-to-end technology, logistics and distribution operations.”
It is a significant step for Morrisons, which is the last of the big four grocers to launch an online food offer. It has been under mounting pressure from the City to grow its ecommerce and convenience businesses. Reports of a potential tie up between the two retailers emerged in March.
Earlier in the week, Waitrose boss Mark Price expressed his concern over any tie up. Waitrose already has a long-held partnership with Ocado.
Morrisons said its grocery website will have its own “look and feel” but that the fulfilment will be conducted from Ocado’s new Dordon Customer Fulfilment Centre in the Midlands, with customer deliveries through a Morrisons liveried fleet.
“The agreement will comprise a technology and services arrangement and a sale and leaseback of property and equipment at Dordon,” said Morrions.
Morrisons said it expects that the online food business will generate positive EBITDA in 2016/17 and a positive EBIT in 2017/18.
An initial capital payment of up to £170m will be paid by Morrisons to Ocado to acquire Dordon and “associated mechanical handling equipment”, as well as a licence and integration fee. “A further £46m will be invested to expand Dordon in order to accommodate Morrisons’ range, integrate with Morrisons systems and establish a network of delivery spokes”, said Morrisons.
Morrisons will also pay service costs and a contribution to research and development expenditure to Ocado. “The agreement also makes provision for the joint development of new customer fulfilment centres as the parties may determine in future,” added Morrisons. “Ocado will receive a share of the positive EBIT of Morrisons.com.”
Capital expenditure guidance is increased by £100m to £1.2bn to reflect the additional investment and full year debt guidance is increased to £2.7bn.
Morrisons chief executive Dalton Philips said: “This agreement is a significant strategic step for Morrisons. From a standing start, Morrisons will be competing in the fast growing online channel by the end of this year with a really compelling proposition.
“The customer gets our affordable fresh food delivered by Ocado’s state of the art distribution system. I’m confident that Morrisons.com will grow over time to be an operation of real scale and significance while creating meaningful long-term value for Morrisons shareholders.”
Ocado chief executive Tim Steiner said: “Morrisons desire to offer its customers the choice of online shopping illustrates the structural shift we are seeing in favour of the channel.
“We see Morrisons decision to adopt our model to drive its online launch as a further endorsement of our technological and logistical excellence. This validation should support the internationalisation of our model as well as the growth of our UK business by increased market use of our operating model, enhancing capital efficiency and improving returns.
“Our customers will see no change to the service they receive from Ocado as a result of this agreement.
“We will continue to source products under our long-term agreement with Waitrose, and our customers will continue to benefit from the existing high levels of service, wide range of products and competitive prices that they currently enjoy.”