Bradford-based grocer Wm Morrison Supermarkets (MRW) has stunned supermarket industry watchers by announcing a surprise wholesale supply agreement with e-commerce titan Amazon (AMZN:NDQ).

Over the coming months, hundreds of Morrisons products will be available to Amazon Prime Now and Amazon Pantry customers.

The advance of Amazon as a player in UK grocery leaves another cloud hanging over the distressed sector and sees Tesco (TSCO) cheapen 3.7% to 177.4p and J Sainsbury (SBRY) soften 1.3% to 249.6p.

Having set Britain's fourth biggest supermarket on the long road to recovery, CEO David Potts (pictured below) has provided another pleasant surprise for investors in Morrisons, marked up 3.7% at 194.9p after inking a deal with Jeff Bezos-bossed behemoth Amazon.

David Potts 1

This will see Morrisons supply Amazon with a range of fresh and frozen products in a move that fills an important hole for Amazon's Prime Now service, whose key missing component is fresh food.

Morrisons will be able to drive more volume through its food manufacturing business, which has excess capacity following recent store closures and the supermarket's sale of its sub-scale convenience business to My Local last year.

Potts says: '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.'

Shore Capital is leaving its Morrisons forecasts unchanged 'given the start-up nature of the supply venture and our expectation that it will take time to build-up'.

It adds: 'That said, we see the tie-up with Amazon as being potentially quite inspired by David Potts CBE, chief executive officer, of Morrisons, as it is highly complementary to the business in its current form. We have heard it said by some that Mr. Potts may be more of a retailer than a strategist; such folk may need to think again.'

The Amazon tie-up sits oddly with Morrisons' existing supply deal with Ocado (OCDO).

Today, Morrisons flags a potential new deal with Ocado, where it will obtain access to a second Ocado depot – taking space in Ocado's new Customer Fulfilment Centre (CFC) under construction in Erith – and Ocado will aim to provide Morrisons with the technology to carry out in-store based picking.

Significantly, this new deal depends on Morrisons achieving profitable growth online.

Today's share price casualty is Ocado, sold down 7.2% to 261.7p as its partner has opened the door to a competitor and with a rumoured Amazon bid now unlikely.

Bernstein analyst Bruno Monteyne likens the Amazon deal to Morrisons 'letting the barbarians in'; he notes that by having a credible fresh food supply in the UK, Amazon can now build scale and expertise and really make an impact on the UK food retail market.

Web - Morrisons - Feb 16

'It doesn't seem to be a good sign that Ocado's first and only retail partner has already moved on and prefers to work with Amazon.

'In Ocado's defence, Morrisons' deal with Amazon is completely different than the deal with Ocado but we doubt that many people will care about that.

'Ocado derives material impact from the Morrisons deal and probably can't walk away from the deal. So they are forced to stay supporting a retailer who just opened the door to a potential new threat to Ocado. While there were press reports recently that Amazon may want to buy Ocado, it seems Amazon is more interested in access to a fresh food supply chain than in the technology of Ocado.'

Issue Date: 29 Feb 2016