The grocer Waitrose is considering taking legal action against Ocado after the online specialist struck a 25-year, £170m deal with Morrisons to enable the supermarket chain to sell food on the web.
Ocado has sold the freehold on its distribution centre in Warwickshire and will license its technology to Morrisons, which will use the Dordon facility to deliver online food orders.
Shares in Ocado, which has not made a pre-tax profit in 11 years, soared by nearly 36 per cent yesterday as the deal strengthens its previously weak balance sheet in one fell swoop, and gives it funding to invest heavily in its technology and ramping up its delivery service. But Waitrose’s managing director, Mark Price, is understood to be angry about Ocado paving the way for a major rival to enter the fast-growing online market.
Mr Price said: “We will be looking very hard and carefully at the contract and the operational arrangements. We have engaged a QC to help us do that. And we want to ensure that our customers have the ability to continue shopping with Waitrose in any event.”
Waitrose is beefing up its own online service, and will open a second dot.com store – which do not open their doors to the public but are used to fulfil online grocery orders – in London next spring. After consulting closely with its lawyers, Ocado’s chief executive, Tim Steiner, said he did not expect Waitrose to launch a legal challenge to the Morrisons deal “because there are no grounds” for it to do so.
“It leaves our existing deal with Waitrose unaffected,” he added.
Mr Steiner said yesterday’s agreement would benefit both companies, as the funding it provides would enable Ocado to grow more quickly which, in turn, will increase the contractual fees it pays to Waitrose.
The sourcing agreement between Ocado and Waitrose is due to run until 2020 but there is a break clause that could be exercised in 2017.
Morrisons is the only one of the big four supermarkets that does not sell food online. The market is forecast to double in size to sales of £11.1bn by 2017, according to the trade body IGD.
In addition to the £170m fee, the Bradford-based grocer will invest £46m to expand the Dordon facility to deliver Morrisons’ food, and to integrate it with its own systems.
Morrisons’ chief executive, Dalton Philips, said that its online food business would be profitable by 2017, and the distribution centre is large enough to accommodate sales of up to £500m for both Morrisons and Ocado.
Mr Philips, who is under pressure to reverse falling sales and profits, added: “We will be using Ocado’s technology, logistics and distribution platform.”
But he stressed that it would be Morrisons’ food, website and own-branded delivery vans. “This is our way of accelerating from a standing start into the fast lane,” he explained.
Mr Steiner said: “It [the Morrisons deal] is a massive validation of our model with one of the big four grocers in this country.”
Shares in Ocado, which floated at 180p in July 2010, rose by 72.2p to 274.1p. Morrisons’ shares ticked up 3.9p, or 1 per cent, to 286.5p.