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| Ocado tie-up to help Morrisons start selling groceries online | Ocado tie-up to help Morrisons start selling groceries online |
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| Morrisons supermarket has confirmed a 25-year tie-up with Ocado, sending the online grocer's shares soaring by 25% and potentially enraging its former exclusive partner Waitrose. | Morrisons supermarket has confirmed a 25-year tie-up with Ocado, sending the online grocer's shares soaring by 25% and potentially enraging its former exclusive partner Waitrose. |
| Morrisons will use Ocado's technology and distribution network but retain its own branding for online deliveries. Morrisons's chief executive, Dalton Philips, said: "This is a Morrisons website, it's Morrisons food in a Morrisons van with a Morrisons driver; it's Morrisons the whole way through. [Ocado] are simply providing the technology and the platform." | |
| The deal will allow the supermarket – which has blamed its lack of an online operation for a slump in profits – to start grocery deliveries to customers by January 2014. It provides Ocado with a new business model, as its partnership with Waitrose grows increasingly unstable. | The deal will allow the supermarket – which has blamed its lack of an online operation for a slump in profits – to start grocery deliveries to customers by January 2014. It provides Ocado with a new business model, as its partnership with Waitrose grows increasingly unstable. |
| Ocado mostly sells Waitrose food, although it has been adding products from foreign supermarkets to its range since 2011. Waitrose helped Ocado launch in 2001 with a cash injection of £46m, leaving it with a 40% stake in the business, which it sold in 2011. The pair's 10-year supply contract lasts until 2020, with a break clause in 2017. But Waitrose has expanded its own direct delivery service in recent years, causing analysts to question Ocado's long-term business model. | Ocado mostly sells Waitrose food, although it has been adding products from foreign supermarkets to its range since 2011. Waitrose helped Ocado launch in 2001 with a cash injection of £46m, leaving it with a 40% stake in the business, which it sold in 2011. The pair's 10-year supply contract lasts until 2020, with a break clause in 2017. But Waitrose has expanded its own direct delivery service in recent years, causing analysts to question Ocado's long-term business model. |
| Waitrose appears uncomfortable with the new tie-up. It emerged last week that company bosses had asked for legal advice about Ocado's discussions with its rival Morrisons and said a conflict of interest was inevitable if the two came to an agreement. Insiders said a deal to help Morrisons launch its own website could cost Ocado up to £40m for breach of contract. Waitrose declined to comment after the deal was announced on Friday. | Waitrose appears uncomfortable with the new tie-up. It emerged last week that company bosses had asked for legal advice about Ocado's discussions with its rival Morrisons and said a conflict of interest was inevitable if the two came to an agreement. Insiders said a deal to help Morrisons launch its own website could cost Ocado up to £40m for breach of contract. Waitrose declined to comment after the deal was announced on Friday. |
| Ocado could not be reached but Philips said the group was not concerned about any legal issues that may arise. "Clearly by Ocado's board approving this transaction, they are comfortable with it. We're comfortable too." | Ocado could not be reached but Philips said the group was not concerned about any legal issues that may arise. "Clearly by Ocado's board approving this transaction, they are comfortable with it. We're comfortable too." |
| Ocado's chief executive, Tim Steiner, said in a statement: "Our customers will see no change to the service they receive from Ocado as a result of this agreement. We will continue to source products under our long-term agreement with Waitrose, and our customers will continue to benefit from the existing high levels of service, wide range of products and competitive prices that they currently enjoy." | |
| He suggested this deal could lead to other arrangements to license its technology to foreign supermarkets. Ocado's chairman, Lord Grade, said at the company's annual meeting last week: "The intellectual property of the business, we believe, is going to be very, very valuable and how we exploit that in the future domestically and internationally is very much a matter for the board in due course." Under the terms of the Morrisons deal, Ocado can only provide technology to one other UK grocer, which would currently be its own online business. | He suggested this deal could lead to other arrangements to license its technology to foreign supermarkets. Ocado's chairman, Lord Grade, said at the company's annual meeting last week: "The intellectual property of the business, we believe, is going to be very, very valuable and how we exploit that in the future domestically and internationally is very much a matter for the board in due course." Under the terms of the Morrisons deal, Ocado can only provide technology to one other UK grocer, which would currently be its own online business. |
| Morrisons has agreed to pay Ocado 25% of any positive earnings from its website, which reduces to 10% after 15 years. It expects the online operation to start making money from 2017/18. It will also pay an annual fee towards research and development at Ocado of £8m for the first two years, and one-third of Ocado's annual research and development spending afterwards, capped at £8m. | |
| Morrisons will initially invest £216m to buy a delivery hub from Ocado and increase its capacity, which it will subsequently lease back to the online grocer. | Morrisons will initially invest £216m to buy a delivery hub from Ocado and increase its capacity, which it will subsequently lease back to the online grocer. |
| The announcement sent Ocado shares up 25% to 251p. Morrisons shares were 1.5% higher at 287p. | The announcement sent Ocado shares up 25% to 251p. Morrisons shares were 1.5% higher at 287p. |