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Morrisons strikes home delivery fleet deal with Ocado

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Morrisons has announced a long term agreement with Ocado, which will enable Morrisons.com to commence grocery deliveries to customers by January 2014.

Fleet News reported that the two were in discussions to launch an online offer, earlier this month.

The agreement aims to enable Morrisons to enter the online grocery market quickly with a profitable business model.

The Morrisons.com grocery website will have a clear Morrisons look and feel, but will be conducted from Ocado’s recently opened Dordon Customer Fulfilment Centre (CFC) 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 in order 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 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.

Dalton Philips, chief executive of Morrisons, said: “This agreement is a significant strategic step for Morrisons.

“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.

“I’m confident that Morrisons.com will grow over time to be an operation of real scale and significance whilst creating meaningful long-term value for Morrisons shareholders.”

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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