Ocado defies Waitrose boss with Morrisons tie-up

Shares in food delivery business Ocado have soared 56% after it confirmed a deal to get Morrisons into online retail by January 2014.

by Michael Northcott
Last Updated: 06 Jan 2016

Morrisons has spent a lot of time trying to keep up with the web bandwagon, rather than actually getting on it. But with this new deal, that could all change rather rapidly. The operation, if it comes to fruition, will use a Morrisons-branded website and vans, but all of the logistical support (technology and distribution centre) will be provided by Ocado in return for a chunk of Morrisons.com profits. It means the supermarket will finally cease to be the only one of the Big Four without online shopping.

So what will the deal entail? Morrisons will pay £170m to acquire Ocado’s Dordon Warwickshire distribution centre (which is one of two), and then another £46m contingency to help expand the centre and establish an advanced delivery network. It amounts to a partial acquisition of Ocado, for which it is a very good deal – not least because Morrisons has agreed to be tied in to the contract for 25 years. That’s practically unheard of in retail.

Speaking to BBC Radio 4’s Today Programme, Morrisons chief exec Dalton Philips said: ‘This is a very good transaction for both parties. We’re going from a standing start to the fast lane in the blink of an eye.’ Well, six months anyway. 

This was really the only deal out there for Morrisons, because organically growing its own online operation could have taken up to five years. With online retail growing apace for the other three supermarkets, this would have left Morrisons in a distant fourth place with almost no chance of catching up.

Ocado’s former Goldman Sachs bosses have driven an extremely hard bargain. Morrisons desperately needs a delivery service up and running, and has evidently paid handsomely both in cash and terms.

But there could yet be a spanner in the works. Currently, 85% of Ocado’s revenues come from its existing delivery deal with Waitrose. It emerged on Monday that lawyers for owner John Lewis Partnership are trying to work out whether Ocado’s plans would constitute a breach of contract. 

Waitrose MD Mark Price even said: ‘I would never knowingly sign a contract with Ocado that agreed to them working with another retail competitor.’ The ball is now firmly in Price’s court: does he try to turn Ocado over for breach of contract (and risk damaging JLP’s squeaky-clean, uber friendly reputation), or quietly continue on the existing deal?

This is actually a clever bit of deal making, which has given rise to a conundrum for Waitrose and is a big punt for Morrisons. Ocado shareholders, on the other hand, are evidently pretty chuffed – the possibility that it might make some decent money at long last must be mouth-watering for them. You can expect the deal to yield more drama before it is signed and sealed…

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