Morrisons is in talks with Ocado to enter the fast-growing British online grocery market. This raises questions about Morrisons’ capabilities and Ocado’s business model, not to mention what Waitrose thinks of the matter - with MD Mark Price this weekend issuing a warning about a potential breach of contract.

Sixteen years after Tesco introduced grocery dotcom to the British, it remains a surprise to us that one of the UK’s top four players remains so far behind the curve. With circa 5% of the UK grocery market now online, Morrisons is effectively competing with only 95% of the ‘cake’.

The imperative to offer this online service, therefore, is immediate. What we cannot understand, especially with its extensive network of stores with large preparation areas, is why a) it is taking Morrisons so long and b) talking to Ocado?

“Ocado would lose 80% of its customers without Waitrose on board”

Quite what Ocado brings to Morrisons remains to be seen but it appears to us that the supermarket group is engaging in the reinvention of the wheel. As for Ocado, we have always had problems with its business model, believing it to be a low-margin but over-capitalised third-party distributor rather than a high-margin proprietary retailer.

By possibly working with Morrisons, and, we must surmise, potentially talking to other retailers too, its potential direction as a service provider is underscored, making it a much less valuable business to our minds. However, there is a much greater worry to us and that is its relationship with Waitrose.

Waitrose is in a prolonged groove with a demonstrably enviable capability. It has a long-term exclusivity agreement with Ocado and we do not believe it is an exaggeration to state that Ocado depends upon Waitrose to the extent that we have dubbed it ‘Waitrose on wheels’.

Whether Morrisons can utilise Ocado’s facilities and technology and Ocado not be in breach of its contractual relationship with Waitrose remains to be seen the damage from a relationship perspective, though, may be deep.

More to the point, we do not see Morrisons as a substitute for Waitrose, asserting as we do that Ocado would lose 75% to 80% of its customers without Waitrose on board. To us, Ocado is playing with fire.

Dr Clive Black is head of research at Shore Capital Stockbrokers

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