UK Retail – Ocado deal with Morrisons finalised to unveil online retail platform, potentially incensing Waitrose

After a substantial amount of speculation, supermarket Morrisons will finally have an online grocery retail presence, after launching its new agreement with Ocado this week. The deal has, however, not gone unnoticed by competing supermarket Waitrose, who also have an arrangement with the delivery firm.

The introduction of e-retailing for Morrisons at the end of this year will use Ocado’s newly opened circulation centre just off the M42 near Tamworth in the Midlands for deliveries via a Morrisons-liveried fleet. From a customer perspective, the operations will be totally separate from Ocado’s core business. I personally do not do my grocery shopping online. This, in general is because I am buying only for myself and despite the higher costs and lack of choice the convenience of popping into my local Tesco Extra / Co-Op is the biggest pull for me.

On the other hand, I can see how others might benefit in doing a big weekly/monthly family shop online or a one-off Christmas shop. My parents do not currently shop online but Ocado and Morrisons’ have agreed a 25 year contract and I would not be surprised that during this time period some of their custom could be brought online if the process was made simpler and easier than shopping locally. This 25-year arrangement, includes Morrisons remunerating Ocado up to £170m so that they can procure the site and equipment. Morrisons are obligated to produce sales of at least £100m by year three and £200m by year five. Otherwise, Morrisons will squander its exclusivity protection.

Morrisons chief executive Dalton Philips has also spoken this week with confidence that the grocer can outpace the online food market through its partnership with Ocado. Philips communicated  to Retail Week that the amalgamation of Morrisons’ credentials in fresh food and Ocado’s technology capabilities would enable Morrisons to rapidly win market share.

Unsurprisingly, Waitrose are rightfully worried about the deal and have ordered its lawyers to inspect the deal to see if there has been a breach of contract with the John Lewis Partnership-owned grocer. Conversely, Ocado’s chief executive Tim Steiner has maintained that their contract with Morrisons will have no bearing on the contractual relationship with Waitrose.

I, in fact, tend to agree with Steiner’s claims that the money from the deal will drive customers to Waitrose as Ocado’s overall development will be hastened in the long run. However, it won’t be for a while before I start to regularly use either of their online offerings. This seems to be how the online market is going in terms of per cent of the overall market. According to Columino although the online grocery market will grow nearly 70% from 2012 to 2017, this is from a relatively small base. The proportion of online grocery shopping will only increase from 4.66% to 6.47%. The growth in online retail sales will therefore drive significant new demand for logistics real estate, as talked about in the Jones Lang LaSalle report, but in my view further expansion of the M Local and Little Waitrose store formats is almost as focus important for both retailers.