(Bloomberg) -- Wm Morrison Supermarkets Plc extended an agreement with Ocado Group Plc in a move that will enable its late-starting U.K. online grocery business to gain national coverage.
Morrison will take space in a new Ocado warehouse in southeast London, while also licensing technology that will allow it to fulfill online orders directly from its stores, the companies said Tuesday.
The revised arrangement comes three years after Morrison first teamed up with Ocado to add an online grocery service that most of its main competitors had been providing for years. For Ocado, the renegotiated tie-up provides a boost after its lack of success in licensing its technology to international retailers.
Following months of talks between the two companies, terms of the 2013 agreement have been revised. Morrison's contractual obligation to share a proportion of future online profits with Ocado will end once it has adopted the Web grocer's technology for fulfilling orders from stores. It will also pay a reduced annual research and development fee to Ocado once it begins operating from the London warehouse.
“Morrison have got most of what they wanted in this agreement,” said Charles Allen, an analyst at Bloomberg Intelligence. “The store-pick solution is very important to Morrison as it gives them flexibility. They were losing out to Tesco and Asda in the north-east and south-west of England.”
Morrison shares rose 1.5 percent to 190.9 pence in early London trading. Ocado advanced 5 percent to 290.1 pence, extending a 6.3 percent gain on Monday after Sky News reported that the agreement was set to be revised.
Reduced Risks
Morrison said the expansion of its online service nationwide means it won't meet its target of breaking even online next year. The company expects losses from its online operations to narrow sequentially.
By handling more of Morrison's online grocery orders, Ocado will be able to reduce the risks of building the distribution center, located in Erith. Last year, Ocado's agreement with Morrison contributed about 74 million pounds ($96.1 million) to its revenue.
The 10.5 billion-pound U.K. online grocery market is set to grow by 68 percent over the next five years, according to estimates by industry researcher IGD.
To contact the reporter on this story: Sam Chambers in London at schambers7@bloomberg.net. To contact the editors responsible for this story: Matthew Boyle at mboyle20@bloomberg.net, Paul Jarvis
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