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Morrisons will use Ocado infrastructure when it launches its online food service in January

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Morrisons this morning confirmed its long-awaited online grocery service would launch in January, delivered in partnership with Ocado.

The supermarket, which is the last of the big four UK supermarkets to sell groceries over the internet, will launch its own grocery website in January, deliver through its own Morrisons’ branded fleet but fulfilment will be via Ocado’s new Dordon Customer Fulfilment Centre in the Midlands.

“This agreement,” said Dalton Philips, chief executive of Morrisons, “is a significant strategic step for Morrisons. From a standing start, Morrisons will be competing in the fast-growing online channel by the end of this year with a really compelling proposition. The customer gets our affordable fresh food delivered by Ocado’s state of the art distribution system. I’m confident that will grow over time to be an operation of real scale and significance while creating meaningful long-term value for Morrisons shareholders.”

Morrisons is to spend £170m buying the Dordon customer fulfilment centre (CFC) and related equipment, and the rights to half of the existing capacity. It will invest £46m on expanding the centre to accommodate its range, integrating it with Morrisons’ systems, and setting up a network of delivery spokes. It has also licensed Ocado technology, logistics and distribution services on a 25-year agreement. The agreement also allows for jointly-developed new CFCs in the future.

The supermarket also expects to spend a further £25m in development costs during the year, taking its total new business development costs for the year to £65m, and its full-year debt guidance to £2.7bn.

Tim Steiner, chief executive of Ocado, said the deal would strengthen its balance sheet and share the costs of its fulfilment centre. He said: “Morrisons’ desire to offer its customers the choice of online shopping illustrates the structural shift we are seeing in favour of the channel. We see Morrisons’ decision to adopt our model to drive its online launch as a further endorsement of our technological and logistical excellence.

“This validation should support the internationalisation of our model as well as the growth of our UK business by increased market use of our operating model, enhancing capital efficiency and improving returns.”

Waitrose had been reported to have concerns about Ocado’s involvement in Morrisons’ online grocery service. But today Ocado’s Tim Steiner said Ocado’s other customers would not be affected by the deal.

“Our customers will see no change to the service they receive from Ocado as a result of this agreement. We will continue to source products under our long-term agreement with Waitrose and our customers will continue to benefit from the existing high levels of service, wide range of products and competitive prices that they currently enjoy.”

Commenting on the deal, Sam Fuller, UK head of consumer and leisure at international investment bank Altium, said: “On paper the Morrisons deal looks like an excellent one for Ocado and a ringing endorsement of its platform and business model. Morrisons is one of the big four supermarket chains but its lack of online service and local convenience stores has put it at a disadvantage to its rivals.

“The terms of the 25-year agreement will offer Morrisons much more visibility in the marketplace and provides Ocado with the security it needs by generating a welcome chunk of funds for the firm to pay down debt. Morrisons, which is strong in the north of England, also offers Ocado a counterbalance to its deal with Waitrose, which is much stronger in the south.

“That said, Waitrose has made some ominous noises about a potential tie-up with Morrisons and its reaction to it. At best it is likely to annoy Waitrose. At worst it could result in legal action to try to prevent the Ocado-Morrisons tie-up happening before Ocado’s contract with Waitrose comes to an end in 2017.”

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