Ocado has agreed in principle a landmark five-year deal with Waitrose, paving the way for a potential flotation of the e-tailer.

Ocado, which is 24.1 per cent owned by John Lewis Partnership, has cemented an outline agreement for a five-year branding and sourcing contract with Waitrose, ending months of speculation.

The revelation about its future relationship with Waitrose will fire a warning shot across the bows of rivals Asda, Sainsbury’s and Tesco, with which Ocado has been engaged in a bitter battle for market share in the£12.8 billion UK online grocery sector.

A source close to the deal confirmed Waitrose had signed off heads of terms for the proposed arrangement. “What is clear [is] they have now got another five years,” the source said.

Ocado had been on a one-year rolling contract since the end of its previous contract with Waitrose, which was signed in 2000. Planet Retail global research director Bryan Roberts said the new deal would “solidify their supply chain proposition and underscore the quality and service-led offer”.

The City has viewed the lack of a long-term contract with Waitrose as a barrier to a flotation, which is a long-term goal of its founders Jason Gissing, Jonathan Faiman and Tim Steiner.

Finance director Gissing declined to comment on any aspect of talks between Ocado and Waitrose, but said: “Because we are entrepreneurs, we are always challenging ourselves to do things better. We have an excellent relationship with Waitrose and we are delighted to sell their products.”

According to John Lewis accounts, losses attributable to the group from Ocado’s seventh consecutive loss-making year were£7.1 million. However, Ocado has invested heavily in its state-of-the-art distribution centre in Hatfield. Ocado made a pre-tax loss of£43 million for the 53 weeks to December 3, 2006.

Roberts said: “If the bottom line improves, they might start thinking about a potential float. But there is still some concern that they can make a profit and they will have to improve the bottom line further.”

Ocado has been in a feud with Tesco since March, when Ocado launched a campaign to match Tesco’s online grocery prices.