Has Ocado found a mate in Morrisons?

Morrisons is wooing the online grocer for its technology knowhow, but James Thompson considers if it could also have marriage in mind

It has long been speculated that the seemingly unlikely bed-fellows of the supermarket Morrisons and the online grocer Ocado could wander up the grocery aisle together. But many had not expected the Northern supermarket to confirm details of its possible matrimonial vows with the premium food specialist, which delivers Waitrose and own-brand groceries, as soon as yesterday.

Certainly, the massive spike in Ocado's shares on Thursday suggested that many investors had been taken aback by the news that a long-term loving relationship could be on the cards. Confirming their dating, the Bradford-based Morrisons stressed it was only discussing with Ocado a potential tie-up that could see it license the home shopping firm's technology.

Dalton Philips, the chief executive of Morrisons since March 2010, said: "There have been discussions [with Ocado] around intellectual property – essentially their technology and operating practices. They are discussions around a possible commercial relationship."

The UK's fourth-biggest supermarket stressed that the discussions do not involve Morrisons "acquiring either the whole of, or an equity stake in, Ocado". But the 32.6p, or 24 per cent, rise in Ocado's shares to 170p yesterday suggested that the City was licking its lips about some possible corporate action between the two grocers.

The prize at stake is big, as food sold online accounted for £5.6bn of £163.2bn of total grocery spending last yearand is forecast to double to £11.1bn by 2017.

Morrisons was adamant yesterday that it will launch food online before February next year, irrespective of the outcome of its talks with Ocado. But a possible tie-up, where Morrisons licenses Ocado's technology, could plug a gap in the supermarket's online capability.

Dan Coen, a director at the advisory firm Zolfo Cooper, said a potential joint venture with Ocado would give Morrisons "a ready-made platform for a successful online business".

Ocado, which floated at 180p in July 2010, has been criticised for never having made a pre-tax profit in its 11 years of operations. But it has superb technology, particularly its bespoke software that helps it to deliver groceries with laser-like accuracy.

However, some analysts are puzzled at why Morrisons is taking so long to launch in a market where Sainsbury's went live in 1996 and Tesco followed the year after. In fact, Morrisons spent £32m, including taking a 10 per cent stake in New York-based Fresh Direct in 2011, to examine online grocery offers across the pond.

Clive Black, an analyst at Shore Capital, said: "Morrisons is struggling to launch an online grocery capability, and why is it delaying launching it until 2014?"

Mr Philips remained tight-lipped on his online food plans, but the launch is likely to combine staff picking groceries for internet orders in-store with dot.com-only facilities, which are used to fulfil grocery orders but don't have any customers, in Yorkshire and around London.

The big question is whether Morrisons would ever consider acquiring Ocado. Dave McCarthy, an analyst at Investec, said: "If Ocado was struggling and failing, then it could be a natural fit."

The price tag would now be huge, as its share spike yesterday gives Ocado a market capitalisation of £845m.

Furthermore, any company that acquired it would have to pay a £40m poison pill to Waitrose. This is because its agreement with Waitrose can be terminated if a rival acquires 50 per cent of Ocado's shares, or control of the board. Mr Black said: "I don't think the market would take it well if Morrisons bought Ocado.The fundamental flaw with the Ocado model is it is centralised fulfilment for a fragmented market, delivering to customers over long distances."

For Ocado, the chance to drive additional revenue from licensing its technology would seem to make sense, but analysts are not convinced.

Mr McCarthy says: "Ocado has talked about selling its intellectual property [IP] to an overseas retailer before, but not to a UK competitor. You would not see Tesco selling its IP to Sainsbury's or Asda. It tells you a lot about how Ocado sees its future."

Alongside confirming its discussions with Morrisons, Ocado reported that its sales grew by 14.4 per cent to £185.5m over the 12 weeks to 24 February, and said its second distribution centre, in Warwickshire, had opened on time and budget. But analysts believe a possible eventual acquisition by Morrisons could be fraught with risk for Ocado.

Mr Black says: "I think Ocado would lose between 70 and 80 per cent of its customers. A key reason why they shop with Ocado is for the Waitrose brand and food. And Morrisons is not Waitrose."

Maybe it's not ultimately a marriage made in food heaven.

Morrisons' gloom: Profits fall

Morrisons posted its first fall in annual profits for seven years yesterday, and revealed a further surprise deterioration in underlying sales, down by 4.1 per cent in its fourth quarter.

Pre-tax profits fell 8 per cent to £879m over the year to 3 February, the first decline since 2005-06, when Morrisons was recovering from its troubled acquisition of Safeway in 2004.

Dalton Philips, the chief executive, said it had been hurt by not selling food online and its relatively small number of convenience stores, although it will have 100 by February. He said: "We are a hugely profitable retailer – significantly more than the second [Asda] and third [Sainsbury's] biggest retailers in the market."

Dave McCarthy, an analyst at Investec, said: "Morrisons is losing out to the discounters more than most because of its Northern bias. And Morrisons' management have admitted they have scored some own goals with their promotions not being good enough."

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
i100
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
health
News
science
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
News
Chuck Norris pictured in 1996
people
ebooks
ebooksA celebration of British elections
Arts and Entertainment
Sarah Lucas, I SCREAM DADDIO, Installation View, British Pavilion 2015
artWhy Sarah Lucas is the perfect choice to represent British art at the Venice Biennale
News
A voter placing a ballot paper in the box at a polling station
i100
News
people
Arts and Entertainment
The Queen (Kristin Scott Thomas) in The Audience
theatreReview: Stephen Daldry's direction is crisp in perfectly-timed revival
Sport
football
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Ashdown Group: Marketing Executive - 6 month FTC - Central London

£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

Ashdown Group: Junior Project Manager (website, web application) - Agile

£215 per day: Ashdown Group: Junior Project Manager (website, web application ...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power