Morrisons has signed a deal with Ocado to launch a home delivery service from January next year, in a move first revealed two months ago (Logistics Manager, 14th March).
The deal solves Morrisons’ problem of how to make an impact the home delivery market despite the fact that it has been much slower than its rivals to launch a service.
Sales will be through the Morrisons.com grocery web site. Fulfilment will be from Ocado's recently opened Dordon Customer Fulfilment Centre in the Midlands, with customer deliveries through a Morrisons liveried fleet.
The agreement will comprise a technology and services arrangement and a sale and leaseback of property and equipment at Dordon.
Morrisons will make an initial capital payment of up to £170m to Ocado to acquire Dordon and associated mechanical handling equipment, as well as a licence and integration fee.
A further £46m will be invested to expand Dordon to accommodate Morrisons range, integrate with Morrisons systems and establish a network of delivery spokes. On an annual basis, Morrisons will pay service costs and a contribution to R&D expenditure.
Morrisons chief executive Dalton Philips said: "From a standing start, Morrisons will be competing in the fast growing on-line 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.”
The agreement also makes provision for the joint development of new CFCs as the parties may determine in future. Ocado will receive a share of the positive EBIT of Morrisons.com.
Morrisons anticipates that its new food.com business will incur a further £25m development costs in the year, as a result of which, its total full year new business development investment will be £65m.
The deal makes sense for Ocado as well. It started out in close partnership with Waitrose, but over the past couple of years Waitrose has been developing its own in-house home delivery services. In response Ocado has been broadening range although it still has a supply agreement with Waitrose.
Ocado chief executive Tim Steiner said: " 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
"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."
Morrisons.com will be entirely separate from Ocado's online business, with its own customers and product range. Morrisons customers will order through a Morrisons.com website, selecting products sourced and ranged by Morrisons, fulfilled and delivered using Ocado's services in a Morrisons liveried van.
Morrisons expects its food.com business to generate positive EBITDA in 2016/17 and a positive EBIT in 2017/18. Capital expenditure guidance is increased by £100m to £1.2bn to reflect additional investment in its Morrisons.com business. Full year debt guidance is accordingly increased to £2.7bn.
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