A latecomer to the ecommerce party, grocer Morrisons now seems determined to be its life and soul with an Amazon tie-up.
The partnership is an example of what Morrisons terms capital light growth – that is, better sweating its assets without the need for costly investment.
In this case, Morrisons is able to deploy its vertical integration strengths as a food manufacturer.
Broker Bernstein estimates that division generates sales of about £2.6bn and an operating profit of £170m.
The broker observes: “With the closure of Morrisons stores – including the exit from convenience – and the market share losses, this business could probably easily take on more volumes and be more profitable as the operating leverage kicks in.”
But where does the deal with Amazon leave Morrisons’ relationship with Ocado, with which it already has an etail partnership?
“The partnership with Amazon has prompted speculation that Morrisons may be able to renegotiate its wider contract with Ocado, the expensive terms of which raised eyebrows when that deal was done”
At the same time as unveiling the Amazon arrangement, Morrisons also said it had reached an agreement in principle to take space in Ocado’s new fulfillment centre in Erith, south London. That may enable it to make greater inroads into the London market.
Ocado will also provide Morrisons with a ’store pick’ solution that would allow the latter to provide a UK-wide service.
Its inability to do so under the existing tie-up with Ocado has been a source of frustration to Morrisons boss David Potts.
The partnership with Amazon has prompted speculation that Morrisons may be able to renegotiate its wider contract with Ocado, the expensive terms of which raised eyebrows when that deal was done.
So Morrisons may end up both having its cake and eating it, by continuing to build its own ecommerce business while providing products for Amazon’s food business, which is so far more limited in range and targeting than a conventional supermarket.
And for Ocado there could be another benefit to its latest deal with Morrisons.
The store picking arrangement gives Ocado a chance to show off its Smart Platform system. A successful implementation might smooth the way to so far elusive intellectual property deals with overseas retailers.
Share price gains
Morrisons’ share price, up to 195p at the time of writing in the immediate wake of the Amazon’s announcement, has been rising most of the year following a better than expected Christmas.
Compared to a year-low of 139p, the stock has traded at as much as 208.2p.
There remains much to be done at Morrisons and Monday’s news did not prompt changes to forecasts in the Square Mile.
But the share price message is that Potts is impressing as he strives to transform Morrisons’ fortunes.