Wm Morrison (LSE: MRW) surprised investors today when it announced that it would be entering into an online joint venture with Amazon (NASDAQ:AMZN).
According to the press release, Morrison’s “ambient, fresh and frozen products” will be made available to Amazon Prime Now and Amazon Pantry customers through the e-commerce giant’s UK website. Morrison shares rose sharply in response to the news, gaining 4.3% by late morning.
Details
Investors have long lamented Morrison’s slovenly response to changes in the way that consumers shop for groceries.
The UK’s fourth largest grocer was spectacularly late to the online shopping party, with the previous management team waiting until 2013 before developing any kind of online capability.
The same is true of the group’s response to the proliferation of convenience shopping and small store formats, with management waiting until 2015 before making more than a half-hearted effort to adapt to the trend that has seen consumers making more frequent, but lower value, trips to the supermarket.
The Ocado issue
The belated entrance into cyber retailing saw Morrison sign into a joint venture with organic grocer Ocado, which now sees Morrison’s goods delivered to web customers using Ocado’s digital infrastructure, as well as its distribution network.
Since launching in 2013 digital sales have grown to exceed £200m, but after Morrison’s new CEO David Potts took the helm, speculation has grown over the fate of the partnership. Analysts have previously described it as inefficient and a less than ideal means of entering the online space, with some going as far as to suggest that Potts could seek to alter the terms of the partnership, or to do away with it completely.
However, Morrison is contracted into the venture for 25 years without a break clause, which means any termination would have to be by mutual agreement. Given that the tie-up is widely credited with being behind Ocado turning its first ever profit, such a separation still seems unlikely.
Judging by the content of the RNS releases emerging from Morrison and Ocado this morning, Morrison.com will continue to be operated by Ocado, with the new partnership between Morrison and Amazon set to serve as an additional digital sales channel.
Implications for investors
There are few financial details available relating to the new venture at the moment but, at first glance, it seems possible that this could be a positive step for both WM Morrison and Amazon.
Amazon will have the opportunity to increase the range of goods offered by its e-commerce platform in the UK, in addition to earning commissions on purchases, while Morrison may be able to attract a larger digital customer base than it has through Morrison.com.
While management at Morrison is still to provide detailed information surrounding the extent of the costs involved with the venture, Potts did go so far as to describe it as a “a low risk and capital light wholesale supply arrangement” this morning, which suggests the initial outlay involved could be minimal.
Although it’s unlikely to do anything about price pressures within the grocery industry, in today’s market any increase in product visibility or distribution should probably be welcomed by investors, particularly when such a thing doesn’t involve any meaningful capital outlay.
