Morrisons came to the ecommerce party late, so it’s no surprise that a game of catch up is now being played. Morrisons and Ocado joined forces in 2013, enabling Morrisons to launch an online business years after rivals Sainsbury’s, Tesco and Asda got going. The grocer has done well tapping into Ocado’s pioneering delivery infrastructure and systems, but growth and profitability have been somewhat held back.
Now a new deal has been struck with Ocado continuing to provide the fulfilment muscle, but allowing a more cost effective arrangement for Morrisons. As of this week, the Yorkshire-based grocer will finally roll out a full nationwide home delivery offer, and will start to see the benefits of reduced costs. This could speed up its journey towards profitability from ecommerce – elusive for Morrisons so far. The company has said in a statement that it expected its online business to remain a loss-making concern in the short-term.
The re-negotiated components of the original contract with Ocado mean that the restriction on store pick has been lifted – opening up new territories for Morrisons. In addition the profit share agreement will be cancelled, and the Research & Development (R&D) fee will be reduced, according to the statement.
There’s more detail and and expert analysis on the strategic thinking behind the deal on www.internetretailing.net.
Extending into new regions
Morrisons’ online shopping service is available to about half of UK households, and has not reached into areas such as the South West or Scotland. However the new deal allows Morrisons to use its own stores to pick products for delivery, thereby doubling its reach. And the grocer will be extending the range on offer too, with a number of non-food brands coming online.
Ocado is to develop a store pick solution for Morrisons.com, now that prior restrictions on using Morrisons own stores to fulfil online orders has been lifted. This will allow the grocer to deliver to s all the areas of the UK. Once the store pick model becomes operational, Morrisons’ contractual obligation to share a proportion of its future online profits with Ocado will end. At the same time exclusivity restrictions on Ocado will also be reduced, although it will still be prohibited from serving certain grocery retailers, namely Tesco, Asda, Sainsburys, Aldi and Lidl.
Morrisons’ Chief Executive David Potts said the latest changes would allow the retailer to reach millions more customers. “The new investments in online growth are further examples of Morrisons building a broader business and will allow millions more customers all over Britain to enjoy Morrisons’ good-quality fresh food and great value for money,” he said.
Break-even point in sight
Morrisons has agreed to take capacity in Ocado’s new Customer Fulfilment Centre (CFC) in Erith, allowing millions more customers to shop with Morrisons.com.
As the company statement points out, this will push the break-even point back. “Our aim has always been to achieve profitable growth online. The extension of our online offer nationwide, through our investments in Erith and store pick, means that the break-even point for Morrisons.com will be slightly later than originally planned when the business operated solely from the Dordon CFC. “
However the statement also shows that Morrison calculates its online operation, together with its wholesale distribution business and food manufacturing division, will boost profits by up to £100m in future.
Online accounted for 6.7% of total UK grocery sales last year, according to BRC figures. However, the category grew by 9% year-on-year at a time when the wider market is in decline.
The online grocery sector is heading towards a bun fight we predict. Ocado, Tesco, Sainsbury’s and Asda could soon face competition from fledgling Amazon Fresh, while bullish discounters Lidl and Aldi are expected to master online shopping very soon. Morrisons is cannily already in bed with Amazon. The grocer announced in February that it had struck a new supply agreement with Amazon, making hundreds of its fresh, chilled and frozen food products available on Amazon’s Prime Now and Pantry services.
Now this new deal with Ocado to boost its own grocery delivery offer on better terms is also a step in the right direction for Morrisons. The principle changes to the partnership put Morrisons in a much stronger position to build its online shopper base and chug towards profitability from its ecommerce business. Starting late was always a gamble, but with a little help from its friends, Morrisons is getting there.
Our thoughts on the Amazon Morrisons grocery deal
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