Morrisons + Ocado – Sitting in a tree?

Following on from my suggestion in September (and indeed Jennifer Creevy’s (Retail Week) in July) Morrisons would be looking towards Ocado as a source of inspiration to kick start their online expansion, the rumours gathered pace today with exposure far greater than my humble blog and Retail Week’s circulation.

Yes, the Daily Mail! They ran a story today that indicates that Morrisons are considering an all cash offer for the online retailing giant (sarcastic smilie) Ocado – that despite the wonderful PR and press cannot escape that it is yet to turn a profit despite lovely vans, fulfilment centres and launching on the Stock market. Morrisons who are booming along nicely post Safeway in 2004 and are ‘actively looking for acquisitions’ according to Dalton Philips their CEO. However I would think he relates to expanding their food production operation as they did earlier this year with the acquisition of Simply Foods – A stir fry / noodle business who were 95% full with Morrisons’ business anyway.

The obvious link for Morrisons and Ocado is that it would give Morrison an immediate infrastructure in the online arena and more importantly give them a presence in the south, something they don’t have in abundance even after the acquisition of Safeway.

Whilst the infrastructure is a positive it also turns into a negative as evidently Ocado has fulfilment centres rather than a network of stores, if Morrisons were to purchase they would inherit fulfilment centres rather than a store network which Dalton has indicated he intends to pursue anyway. It’s not beyond the realms of possibility that butchers, fishmongers and bakers could be employed to produce for online orders only in the fulfilment centres; you can see the fish cuts being customised online – Type of fish then – skin on / skin off? Approx weight / to feed how many? Bones out? Marc Bolland did avoid the online question by asking ‘could you really buy fish online?’

It would appear Dalton thinks so.

The USP of Morrisons is the market street concept and the vertical integration that they have, there is no need for hostility towards selling fresh fish and meat online. There is no reason why it couldn’t be done from their point of view either in store or at the fulfilment centre.

Primary concern alongside whether to buy Ocado is whether move to store based picking or keep the fulfilment centres and the associated cost with that. Dalton Philips has spoken this week about the format when they go online stating that there was extra cost associated with picking in stores and he’s not been convinced it’s the way forward.

Indeed the fulfilment centres / dark stores have had a bit of a renaissance with Asda and Tesco using the dark store style of picking, Asda closed their Watford dark store in 2001 only to reopen it 7 years later as technology and the methodology progressed to make it viable.

Whether Morrisons decide to purchase Ocado or not remains to be seen but their move to fulfilment centres as opposed to favouring instore picking certainly lines them up well for a smooth integration should they bid.

I’d expect them to start their trial in a relatively strong area as Dalton indicated in September; expansion is likely to be relatively rapid once they ascertain success. Their systems upgrade to the Oracle platform will help things along but if they decide to boost their exposure then they may well make a move, especially with Ocado losing their M25 exclusive Waitrose deal in 2013 which is likely to affect them with Waitrose’s burgeoning reputation.

All eyes will be on the forthcoming trial of online – the rumours that Sir Ken will personally deliver the first shop on his bicycle are a little far fetched I gather.

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Grocery Insight provide market insight on the UK sector with a focus on individual retailers such as Tesco. This insight is useful to various stakeholders and due to my store based focus. Insight can be delivered to suppliers to focus on growth opportunities, analysts and investors to assess the business performance and long term outlook and retailers themselves to assess best practice.