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Morrisons lets online partner Ocado talk digital, but will their deal survive?

Stuart Lauchlan Profile picture for user slauchlan March 15, 2015
Summary:
Morrisons turns in its latest set of dismal results, but talking up digital progress is left to partner Ocado, which may itself be too dependent on its rival.

Morrisons
Trollied

We’re Morrisons. We’ve got fabulous brand and a big customer base with a genuine affection for our business.

That was the bold declaration made by Andrew Higginson, chairman of beleagured supermarket chain Morrisons, which turned in its latest set of dismal numbers over the weekend.

We’ve covered Morrisons woes a great deal over the past year as an exemplar of bad practice when it comes to digital transformation. The firm’s lack of investment in an appropriate online strategy has led to quarter after quarter of poor results and ultimately led to the ousting of its CEO Dalton Philips as well as the person who was heading up the digital push.

With a new CEO stepping up to the mark today in the shape of former Tesco executive David Potts, it was left of Higginson and CFO Trevor Strain to try to explain away a 4.9% drop in turnover. Sales from like-for like-stores which includes online fell by £795 million 5.9%. The online contribution was 0.6%.


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So what’s the party line on online? Well, according to CFO Strain:

Morrisons.com is doing pretty well. It's actually ahead of where the plan was. Ocado in terms of our delivery partner do a good job. I think the customer experience is good.

And that was, well pretty much it for digital when it came to the post-results analyst conference call.

Other than that it was holding pattern platitudes from Higginson:

Our destiny is in our own hands. If we invest further in the customer proposition and really get it right, we will see more customers buy more things from us. More customers means more volume and it also means our stores are busier, our colleagues are happier, the food is fresher and we’ll get better deals from suppliers.

All that’s missing is world peace and the cure for cancer.

The Ocado angle

In fact it was left to Morrison’s third party online provider Ocado to try to talk up the firm’s digital prospects. Online-only grocery store Ocado operates Morrisons' online delivery service after the companies agreed a £216 million partnership two years ago by then CEO Philips.

Announcing Ocado’s own results - a 19.2 % increase in sales - Duncan Tatton-Brown, the finance director of Ocado, boasted that Ocado has helped Morrisons.com to grow sales quicker than any online company anywhere in the world:

Morrisons has been very pleased with the operations and the scale of business they’ve built up. I believe they are the fastest growing online grocery business ever because they have gone from a standing start to a £200m run rate, according to their public statements, in a year and their service has the highest service standards.

morrisons ocado
Co-dependency

What will be interesting now is to see what Potts makes of the Ocado alliance. As incoming CEO he has a free hand says Strain. Higginson told analysts last month that he saw the Ocado alliance as one of Philips “better deals”.

For his part, Tatton-Brown was keen to keep analysts calm about the future of the tie-up, which is intended to last for 25 years in total. He said a meeting with Potts was already planned:

I don’t think he needs to worry so much about his e-commerce business because I think that’s doing quite well,We do believe Morrisons did a good deal with us. We know that we are providing a good service to them. We expect to continue to provide a good service for them. So we look forward to the future with confidence.

As part of the original negotiations you want to ensure that a partnership like this which lasts for 25 years, the relationship works well. Contractually both sides are obliged to meet. The reality is we’re pleased with our performance in this area, we believe they are pleased with the service we are providing and we expect it to continue.

For its part, Ocado has good reason to hope the Morrisons deal holds as its contribution arguably helped the former to report its first annual pretax profit in its 15-year history.

Last week Ocado announced first quarter retail revenues of £252million. Over the period, Ocado saw 183,000 orders coming in every week, an increase of 18.1% year-on-year.

But some analysts have raised question marks over the deal as it currently stands. City analyst firm Shore Capital advised Potts to:

re-evaluate the 25-year contract (23 to run) with no break clause with Ocado

Clive Black of Shore Capital warned:

The reality is that Ocado is no longer even aspiring to be a proprietary grocer as it depends upon servicing Morrisons for its growth and Waitrose (John Lewis Partnership) for its product in its core business. Whilst we do not expect any changes in prevailing commercial relationships in the near term, we are concerned about the dependency Ocado has in its business model and the reality that, without competitors, it would not have a business at all!

Looking ahead we do not expect Ocado to move any dials in UK grocery. We look out for what Messrs Potts and Price at Morrisons and Waitrose respectively plan to do strategically, so nothing around the corner in all likelihood, but we continue to harbor deep concerns about Ocado’s positioning.

As indeed of course do many analysts have ongoing concerns about Morrisons, including George Scott, senior consultant at retail sector analyst firm Conlumino:

Morrisons is the most vulnerable of the Big Four grocers to anaemic market growth and the ongoing squeeze from the discounters.

Morrisons’ attempts to get back on track have had some merit, but it has been late to the game and its initiatives appear disjointed.

Scott actually sees the Ocado relationship for Morrisons as:

undermining its ability to integrate it within its core proposition compared to the likes of Tesco and Asda which link their online shops well to stores through click & collect provision.

Morrisons needs a clearer strategy that plays to its roots more effectively and helps it to reconnect with its traditional customer base.

My take

So who’s more dependent on who?

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