Online grocery retailer Ocado is “playing with fire” as it negotiates a deal with Morrisons, which is eyeing a late entry into the online market, analysts have warned.
Ocado has been accused of 'playing with fire' as it negotiates a deal with Morrisons
Ocado’s share prices took a tumble on Monday, May 13, falling by 11%, having reached a near year high on Friday, following assurances by Ocado that its dealings with Morrisons would not affect its core partnership business with Waitrose. Shore Capital estimated Ocado’s business with Morrisons accounted for about 75-80% of its total sales.
News of the potential deal - the details of which have yet to be disclosed - spooked Waitrose to the extent that its md Mark Price told The Telegraph it would examine any potential tie-in between Ocado and Morrisons to determine a breach of contract.
“I would never knowingly sign a contract with Ocado that agreed to them working with another retail competitor,” he said. “We have moved to defcon one [on online expansion] because we don’t know where this is going to end up and we are now working on adding considerable extra capacity to Waitrose.com.”
Partnership
At its AGM on Friday, May 10, Ocado stated that any agreement with Morrisons – and there was no certainty an agreement would be reached – would be “complementary” to Ocado’s existing partnership with Waitrose, and that the partnership would be unaffected.
Waitrose, Morrisons and Ocado would not be drawn to comment. But a source told FoodManufacture.co.uk: “Ocado is very well aware of its obligations to Waitrose – Waitrose hasn’t seen the agreement because the agreement hasn’t been reached yet. Waitrose is actually a competitor to Ocado even though it has a partnership arrangement, because it has its own online business, and these are sensitive negotiations.”
Neil Saunders, md of retail consultancy Conlumino, warned that Ocado risked “unravelling its business model” by jeapordising its relationship with Waitrose.
“It can play out in one of two ways: either the purported relationship with Morrisons fizzles out, or it comes to something,” he said. “If the latter, if could either be deemed to be a breach of contract, in which case, Ocado would get themselves into all manner of trouble and risk Waitrose walking away.
“The alternative is that it’s within the letter of the contract that has been signed with Waitrose but Waitrose may be less than happy with it. I think Ocado is playing with fire. They are extremely reliant on Waitrose – in fact, a lot of people think Ocado is Waitrose.”
‘Less than happy with it’
He believed the Morrisons talks were an effort by Ocado to eke out more profitability from its business model but it could backfire, with a contract break clause between Ocado and Waitrose due in 2017.
Shore Capital’s analyst Clive Black told FoodManufacture.co.uk that it would be “mind-boggling” if Ocado had not briefed its corporate partner on its plans with respect to another supermarket.
“It’s arguable that the fire is already lit,” he said. “I wouldn’t be surprised if Morrisons was thinking ‘this may not be what we thought it was’, in terms of Ocado’s capability to deliver the breadth of service that was perhaps first being talked of. Secondly, Waitrose will be seriously reappraising whether it should be working with Ocado going forward.”
Meanwhile, Saunders questioned whether Morrisons’ entry into online grocery would significantly boost the overall market.
“To be successful, I think it is a case of stealing share from other players, and that’s what will make it difficult for them,” he said. “They’re not going to come in and grow the market substantially because most people who want to shop online for groceries already do so, and Morrisons don’t have a sufficiently differentiated brand to attract people who didn’t shop online before.”
