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| Amazon's deal with Morrisons is an upgrade but not a game-changer | Amazon's deal with Morrisons is an upgrade but not a game-changer |
| (6 months later) | |
| Morrisons’ shares up 4%; Ocado’s down 9%. It’s hard to argue with the market’s snap judgment on Monday’s strategic shuffles in the online grocery market. | Morrisons’ shares up 4%; Ocado’s down 9%. It’s hard to argue with the market’s snap judgment on Monday’s strategic shuffles in the online grocery market. |
| At Morrisons, its chief executive, David Potts, has signed a deal to supply hundreds of fresh, frozen and ambient products to Amazon. On the principle that it’s better to be cuddly with the Amazonian monster, rather than stand in its path, Morrisons is being pragmatic, as befits a company that was late to the online game. | At Morrisons, its chief executive, David Potts, has signed a deal to supply hundreds of fresh, frozen and ambient products to Amazon. On the principle that it’s better to be cuddly with the Amazonian monster, rather than stand in its path, Morrisons is being pragmatic, as befits a company that was late to the online game. |
| Morrisons is also the one major supermarket that produces a lot of its own grub, by owning farms and manufacturing facilities. Arguably, that alters the economics of a tie-up with Amazon. Morrisons can still hope to make a profit as a manufacturer and wholesaler on its Amazon lines, even if it is surrendering the retailer’s profit margin. What’s more, Potts also breaks Morrisons’ previous reliance on Ocado’s services in the online market. He now has two partners. | Morrisons is also the one major supermarket that produces a lot of its own grub, by owning farms and manufacturing facilities. Arguably, that alters the economics of a tie-up with Amazon. Morrisons can still hope to make a profit as a manufacturer and wholesaler on its Amazon lines, even if it is surrendering the retailer’s profit margin. What’s more, Potts also breaks Morrisons’ previous reliance on Ocado’s services in the online market. He now has two partners. |
| Trying gamely to sound cheerful about this development, Ocado’s chief executive, Tim Steiner, describes his own possible extended distribution deal with Morrisons as a “win-win arrangement”. Perhaps it will be, but it hasn’t been signed yet and Morrisons says it will proceed only if it brings “profitable online growth”. That sounds like code for Potts demanding better terms than his predecessor signed in the original Morrisons-Ocado partnership. | Trying gamely to sound cheerful about this development, Ocado’s chief executive, Tim Steiner, describes his own possible extended distribution deal with Morrisons as a “win-win arrangement”. Perhaps it will be, but it hasn’t been signed yet and Morrisons says it will proceed only if it brings “profitable online growth”. That sounds like code for Potts demanding better terms than his predecessor signed in the original Morrisons-Ocado partnership. |
| If it happens, the latest deal will differ from the first in two important ways. First, Morrisons won’t be putting up capital to buy half the Erith warehouse in south-east London, as it did at Dordon in Warwickshire. Second, for Morrisons deliveries in Scotland, Cornwall and parts of the north of England, a “store pick” model will be used, which runs counter to Ocado’s core philosophy that centralised distribution is always best. | If it happens, the latest deal will differ from the first in two important ways. First, Morrisons won’t be putting up capital to buy half the Erith warehouse in south-east London, as it did at Dordon in Warwickshire. Second, for Morrisons deliveries in Scotland, Cornwall and parts of the north of England, a “store pick” model will be used, which runs counter to Ocado’s core philosophy that centralised distribution is always best. |
| Maybe such compromises are just the price of getting things done, but it’s yet another thing for Ocado’s shareholders to worry about. They were promised a deal with an international retailer by the end of last year. That hasn’t happened yet, and instead there’s a different type of deal with an established customer that is now cosying up to Amazon. | Maybe such compromises are just the price of getting things done, but it’s yet another thing for Ocado’s shareholders to worry about. They were promised a deal with an international retailer by the end of last year. That hasn’t happened yet, and instead there’s a different type of deal with an established customer that is now cosying up to Amazon. |
| The commercial terms (confidential, of course) will be all-important but the landscape is starting to look a tad complicated in Ocado-land. Waitrose supplies Ocado, as well as running a competing online offer. Ocado will run a fully national home delivery service for Morrisons, but Morrisons will also supply Amazon, which in theory could become a direct competitor to Ocado. It looks messy. As for the idea of Amazon buying Ocado, that seems a non-starter. | The commercial terms (confidential, of course) will be all-important but the landscape is starting to look a tad complicated in Ocado-land. Waitrose supplies Ocado, as well as running a competing online offer. Ocado will run a fully national home delivery service for Morrisons, but Morrisons will also supply Amazon, which in theory could become a direct competitor to Ocado. It looks messy. As for the idea of Amazon buying Ocado, that seems a non-starter. |
| For the rest of the supermarket sector, the question is whether Amazon is finally getting serious about groceries in the UK. The addition of “hundreds” – but not thousands – of Morrsions lines is an upgrade but not a game-changer. Amazon is still behaving more like a souped-up convenience store. The serious assault is still awaited, but is probably coming. | For the rest of the supermarket sector, the question is whether Amazon is finally getting serious about groceries in the UK. The addition of “hundreds” – but not thousands – of Morrsions lines is an upgrade but not a game-changer. Amazon is still behaving more like a souped-up convenience store. The serious assault is still awaited, but is probably coming. |
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