Britain's fourth-biggest supermarket Morrisons (MRW) advanced 2.5% to 278.4p after unveiling plans to finally enter the online grocery market. Set to launch its first online food operation by the end of January 2014, excitement also surrounded the Bradford-based retailer's talks with Ocado (OCDO) which could lead to a technology tie-up between the two companies.
Responding to an announcement from Ocado this morning, Morrisons confirmed talks are underway with the web-based grocery delivery firm, which recently (22 Jan) appointed retail heavyweight Sir Stuart Rose as chairman. It said these talks 'may lead to an agreement to licence certain of Ocado's intellectual property and operating knowledge'. This means a joint venture could be in the offing as Morrisons seeks to make its long-awaited debut in the fast-growing UK online grocery business (potentially) using Ocado technology and capacity.
The £6.2 billion cap supermarket stressed its decision to enter the online grocery market 'is not dependent on the outcome of these discussions' and a deal is by no means a formality. In its own market missive Ocado, a 'marmite' stock (you love it or hate it) linked to whispers it may be taken over by Morrisons or even Marks & Spencer (MKS) given the link with its new chairman, poured cold water on corporate activity.
The £501 million cap, up 22.6% to 168.4 on today's revelations, stated that the talks 'do not involve any discussion of Morrison acquiring either the whole of, or an equity stake in, Ocado' and insisted any deal would only complement its existing partnership with John Lewis-owned Waitrose.
The market clearly welcomes the news from struggling Morrisons, late to the party in both convenience and the online food market, the two fastest growing sectors of the market and whose chief executive officer Dalton Philips has been in the firing-line as a result.
Philips, who has faced criticism for the delay in manoeuvring Morrisons into position online, says the grocer is looking to make up lost ground. He says the retailer has learned lessons from Kiddicare, the online baby and infant merchandising retailer acquired in 2011, as well as from its involvement with US-based fresh food seller Fresh Direct, in which Morrisons has a minority stake.
Morrisons, which recently launched web-based wine retail offering Morrisons Cellar and acquired a 100,000 square foot distribution centre in West London to support its web-based ambitions, can ill-afford to delay its online foray any longer. Online sales already speak for 3.9% of the UK grocery market and are expected to outpace progress in traditional grocery sales in the years ahead.
The supermarket reveals that its first 12 'M Local' convenience stores, primarily based in the north of England, are performing better-than-expected with first stores in London up and running. Having snapped up 62 stores from Blockbuster, Jessops and HMV last month, Morrisons expects to have 100 'M Locals' open for business by the end of the year.
Sadly, full-year results for the broader group were disappointing, revealing a 4% drop in pre-tax profit to £901 million, in line with downgraded expectations and like-for-like sales (excluding fuel and VAT) down 2.1% in a tough trading year. Nevertheless, the cash-generative company raised the total dividend 10% to 11.8p and this payout is covered a reassuring 2.3 times by earnings up 7% to 27.3p.
Digesting today's news, Panmure Gordon reiterates its 'sell' recommendation and 240p price target. The broker writes: 'Pre-tax profits were in line with lowered expectations. The strategic update is, we think, reasonable. Much needs to be done, but at least Morrison has joined the party.' The investment bank is also sticking with its bearish stance on Ocado, whose second customer fulfilment centre (CFC2) in Warwickshire is now operational and whose first quarter numbers posted today reveal sales up 14.4% to £185.5 million over the 12 weeks to 24 February. 'News of a potential joint venture with Morrisons might help CFC2 economics,' scribbles sceptical Panmure, 'but tells us that Ocado will struggle to use its new capacity productively'.
