Morrisons and Ocado

“This deal should provide a top quality service for Morrisons from the start. But we’re not convinced by the cost.”

So the Morrisons and Ocado deal is now fact. Morrisons is buying capacity at the Ocado warehouse and in the process giving Ocado a useful injection of cash.

Naturally both sides put a positive gloss on it.

For Morrisons:

It gives national coverage immediately – but not until January 2014 and even then there will be a phased roll-out

It is proven technology – but is it? Ocado has yet to make a profit and even when Hatfield was running at full capacity the business was still not profitable

It will be an entirely Morrisons-run business so far as customers are concerned – Morrisons butchers, bakers and Morrisons food delivered in Morrisons-liveried vans. That is important and it should mean that Waitrose will have nothing to complain about in the short term.

For Ocado

It provides much needed cash and shares operating costs of the new under-utilised warehouse. But the business will now need a new warehouse sooner than might otherwise have been the case

Perhaps it also gives Ocado a fall-back option if Waitrose decides to terminate its agreement when it comes up for renewal in 2017.

It’s hard to see how Waitrose could object to this deal now.

Doubts

Morrisons has made two statements about the future:

  • Superstores are now in decline. That’s why it is necessary to invest in convenience stores and online.

  • Morrisons is not convinced by the economics of in-store picking. It gets in the way of customers, it is expensive.

But if superstores really are beginning to decline, surely it would make more sense to get another business to share their overheads. The deal with Ocado gives the online business its own separate overhead, while there will be less turnover to support the store costs.

Nor has Morrisons said anything about how it is going to deal with selling non-foods online.

Being more positive

Of course, Ocado may well in time be able to improve warehouse throughput to the extent where it can be profitable. It has an excellent record for doing so, it’s just that it has not managed to improve it sufficiently to make a profit yet.

Morrisons has bought about £500m of online capacity up to 2017. That would be 2.8% of current turnover and Tesco is already doing 5% of its business online. But Morrisons should have enough to develop a credible online offer. Mintel’s own consumer research shows that 30% of Morrisons customers have shopped for food online, so Morrisons needed to develop an online business just to protect its market share.

There’s no doubt that Ocado is the quality operator in the sector and high levels of service are very important for online shoppers. So that aspect of this deal makes a lot of sense. Morrisons should be able to launch with a service as good as any and be relatively free of teething problems.

It’s just the cost of doing so that leaves us less convinced by the deal.

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