Shares in Ocado (OCDO) have got off to a poor start this week, down 9.8% to 202.7p on worries the online grocer's talks with Morrisons (MRW) have damaged its critical relationship with Waitrose. Having apparently raised the John Lewis-owned supermarket's ire, Waitrose is thought to be looking ever-more-closely at its supply deal with the loss-making online retail specialist.


Weekend press reports suggested lawyers at the John Lewis Partnership are combing through the exclusive grocery supply contract between Waitrose and Ocado, the latter heavily dependent on the former for the bulk of its products. This supply agreement runs until 2020, although Waitrose, which helped Ocado launch in 2001 and sold its 40% stake in 2011, can enact a break clause as early as 2017.


Ocado is in talks with Britain's fourth biggest supermarket over a potential distribution and operational tie-up to help Bradford-based Morrisons launch its own online groceries business by January. It claims any deal 'would be complementary to Ocado's existing relationship with Waitrose.' Alarmingly for Ocado, it is believed Waitrose sees a conflict of interest should the online grocer strike a deal with one of its major retail rivals.


The Telegraph quoted Waitrose's managing director Mark Price as saying the supermarket is adding extra capacity at its own online service,, given the shroud of secrecy surrounding the talks. Reports strongly suggest Price would reject any such deal, which could cost Ocado up to £40 million for breach of contract.


'I would never knowingly sign a contract with Ocado that agreed to them working with a competitor', Price is reported as saying. He continues: 'If a contract is signed between Morrison's and Ocado we will want our legal team to examine it immediately to ensure there are no breaches of contract'.


Clive Black of Shore Capital, reiterating his 'sell' rating on Ocado this morning, believes the Hatfield-based company is playing with fire, 'because the group's umbilical cord to Waitrose may be cut sooner than we anticipated and Ocado cannot exist as a commercial entity without Waitrose in our view.' Pointing out the mood of Price appears 'deadly serious', the analyst writes that 'Ocado may have irreparably polluted a commercial relationship upon which it is dependent and it must lead to a greater chance of a break in 2017 in our view.'


Aided by bid whispers, anticipation surrounding the Morrisons deal, a £36 million funding last year and the appointment of well-followed retailer Sir Stuart Rose as chairman, Ocado's shares have soared since November, moving past its 180p stock market debut (2010) price.


Ocado, whose net income figures were still in the red in 2012, saw a protest vote by shareholders at last week's AGM over boardroom pay packages which include a 30% salary rise for chief executive Tim Steiner. Since flotation, the company has seen consistent cash flow and earnings downgrades and bears insist it is losing market share to multichannel competitors.

Issue Date: 13 May 2013