Morrisons announces supply deal with Amazon - new killer combo?

Profile picture for user ddpreez By Derek du Preez February 28, 2016
Summary:
Struggling supermarket Morrisons has revealed a new deal with web giant Amazon to bolster its delivery capabilities and logistics. Is it enough?

Morrisons

Struggling supermarket chain Morrisons has surprised this morning with an announcement that it is entering a new wholesale supply agreement with Amazon. The deal is a clear signal to supermarkets in the UK that Amazon is serious about home deliveries of fresh produce and is likely hoping that it can compete with its advancing logistics capabilities.

However, the deal is also likely to leave investors wondering about Morrisons’ future relationship with online retailer Ocado, which CEO David Potts is thought to be unhappy with, but can’t do a great deal about, as his predecessor signed a 25 year deal with the company that is thought to be too expensive to exit.

Whilst Ocado has held up Morrisons’ online business for the past few years, making home deliveries possible for the supermarket, up until now it hasn’t been able to serve huge parts of the UK - such as the north and Scotland, where Morrisons has a strong brand presence.

However, an agreement has also been reached with Ocado today to make nationwide delivery possible.

It is estimated that Morrisons’ share of the market in terms of online deliveries is around 3% at the moment.

The deal

So could a deal with Amazon accelerate both businesses’ presence in the market for online food deliveries? Quite possibly. Especially when you consider Amazon’s investments in food delivery networks and logistics.

Whilst Amazon already does deliveries via its Amazon Now and Amazon Pantry service, these do not include fresh foods and are currently limited to certain parts of the UK.

Morrisons CEO Potts said that the agreement complemented the supermarket’s six point strategic plans, which focusses on:

  • Being more competitive
  • Serving customers better
  • Finding local solutions
  • Introducing popular and useful services
  • Simplifying and speeding up
  • To make core supermarkets strong again

If you analyse the agreement by these metrics, it does seem that the Amazon partnership does fit well with Morrisons. The problem is that for Morrisons to continue competing with the likes of Tesco and Asda, which dominate the online delivery market, it needs to be able to differentiate its delivery service, or at the very least offer a service that matches those that have been doing it for a few years already.

To do it itself it would need to both exit the Ocado agreement (costly) and invest in its own delivery network (also costly). The alternative is to partner. And if you’re going to partner with anyone, Amazon is a pretty good bet - when considering what it’s capable of in terms of customer experience journeys and delivery times.

Amazon Now, for example, can see goods delivered via a mobile app delivered to your front door in under an hour. That’s a differentiator that the likes of Tesco and Asda may find difficult to compete with.

Upon announcing the agreement, Potts said:

Today's agreement is built on Morrisons unique strengths as a food maker. The combination of our fresh food expertise with Amazon's online and logistics capabilities is compelling.

This is a low risk and capital light wholesale supply arrangement that demonstrates the opportunity we have to become a broader business. We look forward to working with Amazon to develop and grow this partnership over the coming months.

Interestingly, Morrisons also took this moment to announce that an “agreement in principle” has been reached with Ocado, which involves Morrisons taking space in Ocado’s new Customer Fulfilment Centre in Erith, and Ocado delivering a store pick solution for Morrisons that “leverages” Ocado’s technology and Morrisons store assets.

It said that when implemented, this would enable Morrisons and Ocado to see to customers all over Great Britain - which has been a sticking point up until now.

More to come

It’s also worth noting that partnerships and deals of this nature are likely to become more likely. Or at the very least, we are going to see businesses with huge investments in physical assets and strong brand presence looking to online providers to help ‘fill the gaps’.

It’s a quicker and more cost effective way to bring in those skills and capabilities.

Sainsbury's

Similarly, we are likely to see more businesses with complementary approaches being acquired. Take a look at the potential Sainsbury’s takeover of Argos, for example.

Whilst Sainsbury’s already has investments in online delivery, it recognises that Argo has a much stronger play that it can use to its advantage. I wrote a couple of months ago:

It used to be the case that the big four supermarkets only had to worry about eyeing each other up over the Christmas period, waiting to see who beat who and who in their results.

But as we all know, times are changing, and it’s no longer safe to assume that a traditional supermarket business is going to be the one that eats into your market share. It could in fact be that small west-coast internet company, Amazon, that starts to make a dent in your sales. Even though you’ve made significant investments digital and your online sales are on the up.

Multi-channel, logistics and customer choice have never been more important and supermarkets are finding it difficult to scale up quickly on their own. Which might be why Sainsbury’s, one of the UK’s largest supermarket brands, has revealed that it has approached Home Retail Group (the owners of Argos) about a possible takeover.

Why Argos? Because it has the footprint, it has pretty decent multi-channel capabilities and the two companies share a similar customer base. It gets Sainsbury’s there quicker than it could on its own.

With this in mind, it’s easy to see why Morrisons has a strong interest in Amazon.

However, unfortunately for Sainsbury’s, its interest in Argos has sparked a rival bid for the company from South African retailer Steinhoff, which has prompted some resistance from Sainsbury’s shareholders to up the price.

Nonetheless, those companies that have invested in their online and multi-channel capabilities are in an excellent position going forward to woo the market.

My take

We are likely to see a lot more of this in the coming months.