WAITROSE has demanded to see the detail of Ocado’s £200 million-plus tie-up with Morrisons which has fast-tracked its rival’s entry into the online shopping sector.
Morrisons said it would be able to start its internet business by the end of this year under the agreement, which will see the chain use Ocado’s distribution centre in Warwickshire for deliveries through a Morrisons-branded fleet.
Morrisons and Ocado said the deal would not affect Ocado’s existing deal with Waitrose which extends to 2020.
But Waitrose, which has already instructed lawyers over the deal given potential competition issues, said yesterday it had asked to see the detail of the contract to ensure there was no breach of its existing agreement.
“Once we’ve done that, we’ll decide what appropriate action to take,” a spokesman for Waitrose said.
Shares in Ocado rose by more than a third on the news and retailing analyst Nick Bubb said at first sight the agreement “looks like an extraordinarily attractive deal” for Ocado with “mid teen millions of pounds” of extra profit a year.
Referring to a conference call with analysts to discuss the deal, Bubb said Ocado chief executive Tim Steiner had been “very
defensive” about his relationship with Waitrose managing director Mark Price.
But he said : “He [Steiner] did make the point that the deal should be good for them [Waitrose] as well.”
Bubb said the extra money would enable Ocado to invest in IT systems and service levels.
Fidelity portfolio manager Tom Ewing, who has a 4 per cent position in Ocado through the Fidelity UK Growth Fund, also said the deal was “incredibly positive” for the delivery firm.
“Beyond the transformational financial implications, it demonstrates that Morrisons agree with our view that online will be the primary driver of future growth in grocery retail in the UK and around the world.”
Ewing said Ocado’s potential has been consistently under-estimated by City investors: “This deal could mark the beginning of a significant shift in the market’s perception of the company.”
Panmure Gordon stockbrokers called the tie-up an “excellent deal” for Ocado but warned that it increased the chances that Waitrose will walk away from its supply agreement when the current contract ends in 2017.
Morrisons online orders will be met from Ocado’s recently opened Dordon distribution centre in central England.
It will make an initial payment of £170m to acquire Dordon, as well as a licence and integration fee. Morrisons said a further £46m will be invested to expand the site in order to accommodate its range, integrate with its systems and establish a delivery network. Online business would be earnings positive by the 2017 financial year.
Shares in Ocado soared by 35.7 per cent on yesterday’s news to close up 72.2p at 274.10p. Shares in Morrisons rose by 3.9p to 286.5p.