The agreement will enable Morrisons to enter the online grocery market quickly with a profitable business model. This industry leading customer proposition combines Morrisons affordable fresh food – much of it from the Company’s own manufacturing facilities – with Ocado’s leading end-to-end technology, logistics and distribution operations.
The Morrisons.com grocery website will have a clear Morrisons look and feel. Fulfilment will be 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. The agreement also makes provision for the joint development of new CFCs as the parties may determine in future. Ocado will receive a share of the positive EBIT of Morrisons.com. Full details of the financial arrangements are set out below.
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. It is expected that the food.com business will generate positive EBITDA in 2016/17 and a positive EBIT in 2017/18. Capital expenditure guidance is increased by £100m to £1.2bn to reflect additional investment in its Morrisons.com business. Full year debt guidance is accordingly increased to £2.7bn.
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”
Tim Steiner, Chief Executive of Ocado said: “Morrisons desire to offer its customers the choice of online shopping illustrates the structural shift we are seeing in favour of the channel. We see Morrisons decision to adopt our model to drive its online launch as a further endorsement of our technological and logistical excellence. This validation should support the internationalisation of our model as well as the growth of our UK business by increased market use of our operating model, enhancing capital efficiency and improving returns “Our customers will see no change to the service they receive from Ocado as a result of this agreement. We will continue to source products under our long term agreement with Waitrose, and our customers will continue to benefit from the existing high levels of service, wide range of products and competitive prices that they currently enjoy.”