Morrisons has signed a 25-year partnership with Ocado to launch an online grocery delivery service next year.
But the move has drawn the ire of rival Waitrose. Executives at Waitrose including managing director Mark Price have demanded to see the terms of the deal over concerns Ocado has breached its contract.
Ocado launched in 2000 with Waitrose as its main supplier. However, relations have become increasingly frayed over the past few years as Waitrose launched its own foot delivery service Waitrose.com and Ocado began selling groceries in its own branded packaging.
It emerged recently that former Morrisons chief executive Marc Bolland, now chief executive at Marks & Spencer, approached Mark Price four years ago to test the water over a possible deal with Ocado. Price said he told Bolland that he would block any deal and Bolland walked away.
The spat between Waitrose and Ocado has overshadowed the historic deal with Morrisons that has seen it become that last one of the 'big four' supermarkets in the UK - including Tesco, Sainsbury's and Wal-Mart-owned Asda - to launch such a service.
Morrisons chief executive Dalton Philips has been notoriously dubious of the merits of online food delivery. He agreed a £32 million minority stake in New York grocery delivery chain Fresh Direct in March 2011 to test the water. According to the terms of that deal Fresh Direct would take a minority stake in any UK online venture established by Morrisons.
The agreement with Morrisons will see the Bradford-based supermarket take control of Ocado's brand new mechanised delivery warehouse in Dordon, Warwickshire, and it will deliver only its own food with its own branded vans. Waitrose food is delivered in Ocado vans with Waitrose name mentioned in smaller graphics.
Morrisons is paying £170 million for the distribution centre and will lease it back to Ocado. A further £46 million will be invested in the Dordon centre. Among the detail of the contract is an agreement that Morrisons will pay £46 million to license Ocado technology, an annual payment of 1 per cent of revenue to cover IT costs, 50 per cent of fixed costs and a 4 per cent management fee linked to operating costs. It will also pay Ocado up to £8 million a year in research contributions and an incentive scheme paying 25 per cent of operating profit which rises to 50 per cent if profit increases beyond 6.6 per cent.
Waitrose is thought to be unhappy that Ocado has introduced another competitor into the market. It has asked for details of the contract with Morrisons so it can examine the consequences of the deal to its relationship with Ocado - and assess whether the terms of their partnerhship have been broken.
Ocado chief executive Tim Steiner has insisted the agreements do not conflict. An Ocado insider told us: 'When the dust settles, Waitrose will see that this deal benefits everyone. Not only is the Morrisons operations entirely separate, but the extra investment it has provided will allow Ocado to invest and enhance its service.'
Morrisons boss Dalton Philips said Morrisons is merely acquring technology rights and expertise from Ocado. Analysts believe it has struggled in part because it does not allow customers to order to their homes. Sainsbury's chief executive Justin King said the service has made shoppers more loyal and means indivudual families that use the service and shop at its stores spend more money overall.
But some experts feel that Philips' previous concerns were justified. One UK analyst, Dr Clive Black at Shore Capital, has calculated that delivering bags of shopping for free to UK households costs supermarkets £15 a time. No supermarkets are transparent about the profit margins involved in online delivery and Ocado last year did not make a profit on sales of £679 million.
However, many agree that online ordering and food delivery has become key to customer loyalty. Most so far agree that Ocado will benefit more than Morrisons from the deal. Ocado shares went up by a third while Morrisons shares climbed only marginally.
Waitrose.com is estimated by our sources to turn over about £250 to £300 million. Sainsury's, which is more than four times the size of Waitrose, said last week its online delivery service had reached almost £1 billion last year.
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