Ocado CEO Tim Steiner today (17 May) insisted the UK online retailer is “cast-iron clear” its new venture with Morrisons has no bearing on its existing partnership with Waitrose.
After months of talks, a deal was announced this morning that will see Morrisons launch an online food service with the use of Ocado’s distribution and technology.
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The talks between Morrisons and Ocado, first revealed in March, have, however, proved controversial due to the online specialist’s existing relationship with upmarket UK grocer Waitrose.
At the weekend, Waitrose MD Mark Price expressed concern about Ocado teaming up with a rival. After Ocado’s deal with Morrisons was announced today, Waitrose was coy about its thoughts on its partner’s new venture. “We’ll be looking at the deal in detail. We have no further comment,” a Waitrose spokesperson told just-food.
In a note to clients this morning, Panmure Gordon analyst Philip Dorgan suggested the deal with Morrisons increases the risk Waitrose will “walk away” from its supply arrangement with Ocado in 2017.
“We are left wondering, what Waitrose will think of the deal? It appears that Ocado is not in breach of its contract with Waitrose, so we don’t expect anything to happen in the short run. However, the chances of Waitrose exiting from its supply arrangement in 2017 must now be high. If this were to happen, there would be a big hole in Ocado’s business and while there is time to build up the necessary infrastructure, it will lose Waitrose’s buying power as well as all of those lovely own label products.”
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By GlobalDataOn an analyst call this morning, Steiner insisted the Morrisons deal would not affect Ocado’s partnership with Waitrose. “I am cast-iron clear that it has absolutely no bearing on the [Waitrose] agreement. I’m not in a position to make a joint statement but I can tell you this [Morrisons] agreement does not cause existing problems with the Waitrose agreement, definitively,” he said.
Steiner fielded a number of questions over whether he had held discussions with Price about Ocado’s plans with Morrisons. “I don’t think it’s appropriate for me to discuss any calls or the nature of any calls with our supply partners,” he said.
The deal with Morrisons will see the UK retailer buy an Ocado fulfillment centre in the Midlands and licence the online retailer’s technology. Under the plans, Morrisons-branded vans will start delivering groceries to customers in January.
Steiner told analysts the deal is “extraordinarily attractive” to Ocado. “It is going to enable us to massively increase our investment in R&D, it improves our economic model with a significant sharing of costs … it validates our operating model and provides a tablet for future IT-like deals. It strengthens our balance sheet, reduces our finance costs and, crucially, it leaves our existing retail business and Waitrose agreement unaffected.”
Steiner suggested signing an agreement with another competitor would not have any effect on Ocado’s own online offer.
“Morrisons had committed to entering the online market already. Demographically and geographically they are in very different strongholds. Our data suggests a very very limited customer overlap. Helping another competitor grow the online grocery channel is good news for a dedicated player.”
He did, however, dismiss a suggestion that it was signing a deal to effectively “raid the north” of the UK retail market.
“We are pleased to see our sales growth increasing and that is continuing to increase and we’re pleased with that. We didn’t see any need to enter into any transactions with anybody. If you went back to our original business plan, which was followed up in 2010, we were always looking to monetise our intellectual property and this is the first transaction we’ve managed to do that. So this has always been part of our business strategy.”
In an interview with The Telegraph earlier this month, Ocado chairman Sir Stuart Rose said third-party deals on intellectual property, “possible international expansion” via joint ventures and licensing agreements were “all part of the future plans for the business”.
Speaking to analysts today, Steiner simply said: “We are approached frequently by people who would like to enter into discussions but our primary focus over the last few months has been on this current transaction.”
Dorgan, however, suggested earlier this month that while an additional revenue stream could emerge from Morrisons, Ocado’s technology and warehouse capabilities do not have “global appeal to other food retailers, nor could they be easily transferred to other retail categories”.
He added: “The reality is that the strategic value in Ocado is substantially lower than these unrealistic expectations anticipate, because it remains a fundamentally flawed model.”
Shares in Ocado were up 29.27% at 261p at 11:04 BST, having risen by more than 40% earlier in the day.
