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Morrisons sets sights on online grocery market

Morrisons has taken its first step towards launching an online grocery service, as it attacked the internet food offer of its rivals Tesco, Sainsbury's, Asda and Ocado.

The UK's fourth biggest supermarket has paid £32m for a 10 per cent stake in FreshDirect, a profitable New York-based online grocer, to gain expertise ahead of launching in London and the South-east in 2013. The surprise move came as Morrisons unveiled a 13 per cent rise in annual pre-tax profits to £869m, a £1bn share buyback over the next two years and the July launch of its first three convenience stores under the M Local banner along the M62 corridor.

The supermarket's investment in FreshDirect – which will give Dalton Philips, the chief executive of Morrisons, a seat on the board – followed its acquisition of Kiddicare, the online retailer of baby products, for £70m last month, that will see it launch a wider non-food offer in 2012. Morrisons said the combined outlay on both businesses was only equivalent to it purchasing three shops, adding its investment in FreshDirect would "pay for itself". FreshDirect will get a "minority economic interest" in Morrisons' planned London online operation.

Morrisons will "embed" a team at FreshDirect to learn how it operates and serves 600,000 customers in New York, Connecticut and surrounding areas. Mr Philips said he believed FreshDirect, which launched in 1999, was the only profitable online food retailer operating at scale in the world. He said "none" of 17 consultancy firms that pitched for its online grocery business had the relevant "expertise" and attacked the "sameness" of the online food offer of its rivals. Of Tesco, Sainsbury's, Asda and Ocado's websites, he said: "We don't believe anyone in the UK has cracked fresh food online [profitably] or have managed to create a significant point of difference. There is little focus on fresh food."

Tesco hit back by saying profits in the grocery operations grew 9.1 per cent for the half-year to 28 August and that its overall dot.com profits – of which grocery accounts for the lion's share – were stable at £58m.

Asda had told City analysts in April 2010 its online business was "profitable" on annual revenues of £500m, which have grown by 30 per cent since then. Ocado is on track to deliver its maiden annual profit this year. Morrisons will target London with food online to take on Ocado, Waitrose and the biggest three supermarkets. But Mr Philips raised the prospect of it adopting a different model for certain areas of the country: "My instinct is that one fulfilment method will not work nationally."

For the year to 30 January, Morrisons grew total sales by 7 per cent to £16.5bn, but on a like-for-like basis, excluding petrol, they grew by only 0.9 per cent. On the outlook for the sector, Richard Pennycook, the finance director of Morrisons, said: "We don't expect it to be any better this year without a World Cup to support summer trading."

Morrisons is also accelerating its new space to 2.5 million square feet over the next three years, which excludes its plans to free up as much as 15 per cent of space in existing stores. It raised its total dividend by 17 per cent to 9.6p and committed itself to "double-digit" dividend growth over the next three years.