It's been a long time coming, but online grocer Ocado (OCDO) has finally renegotiated terms with supermarket chain Morrisons (MRW). Shares in Ocado rose 7 per cent on the day the news was announced – likely a relief rally in light of the fact that Morrisons hasn't walked away altogether.
The new terms are far more preferable for Morrisons compared to the previous contract, which was originally signed by the supermarket's ex-boss Dalton Philips in 2013 for Ocado to effectively run the chain's online delivery business. It was heavily criticised at the time, with City analysts calling the deal "a big transfer of value", specifically referencing the sudden outperformance of Ocado shares compared to the substantial loss of momentum for Morrisons' stock.
But the market seems much happier with the renegotiated deal. Specifically, the new terms allow Morrisons to deliver nationwide, fulfil orders by picking goods from any store and significantly reduce the fees it pays the online specialist. The two have also terminated a profit share agreement which made up part of the original contract.
It's thought that Morrisons' recent side-deal with US retail giant Amazon (US:AMZ) encouraged the Ocado board to enter a renegotiation. But to sweeten the deal, Morrisons has also agreed to take on capacity in Ocado's new multi-million pound distribution centre in Erith, south east London. The grocer will contribute 30 per cent of building costs, although the capacity arrangements come with a five-year break clause.
One other important clause: the original deal banned Ocado from working with more than one competitor of Morrisons at a time. That has been relaxed, although the deal still bars it from partnering with major players Tesco (TSCO), Asda , Sainsbury's (SBRY) and discounters Aldi and Lidl. That's roughly 71 per cent of the British grocery market, 11 per cent of which it already serves via its Morrisons contract.
In June last year, Ocado promised it would sign up a new overseas partner before the end of the year. But its share price has slumped following its failure to finalise a new contract.
