Stricken supermarket chain Wm Morrison (MRW) may be about to become a more formidable opponent for its peers after striking a deal with US retail behemoth Amazon (US:AZN) to sell its wares via the internet giant's new online food delivery service, Amazon Pantry.
The two companies are starting small. The wholesale arrangement is subject to a confidentiality agreement with Amazon, so there's limited information surrounding the contract terms. Suffice to say, Morrisons will supply products from a number of temperature ranges directly to Amazon, specifically chilled and frozen items. However, analysts at Shore Capital have been quick to point out that, as with any supply situation with Amazon, Morrisons won't control the price that products are sold at on the e-commerce group's platform. However, it does have the freedom to determine whether or not it's worth supplying the retailer with specific goods at all.
This development has clearly shone a spotlight on Morrisons' current online operations and its online and distribution agreement with Ocado (OCDO). According to Tristan Chapple, head of research at Phoenix Asset Management which owns a 1 per cent stake in the grocer: "Morrisons can now take online growth through Amazon instead of Ocado."
There have long been murmurs that Ocado and Morrisons' original contract was less than favourable to the latter, so a renegotiation is hardly surprising. Now, under a new set of contract terms Morrisons has the option to take 50 per cent of the capacity of Ocado distribution hubs as they are built.
City analysts agree the implications of this deal aren't great for Ocado. According to Darren Shirley from Shore Capital, the Amazon contract enhances a pure-play challenge in the UK. But actually the advance of Amazon in the UK grocery sector is a challenge to all participating companies in food retail.
The contract with Morrisons fits with the supermarket chain's strategy to grow its online business by volume, and should also help its penetration of London and the south-east in a far more capital-light manner than via expansion of the store estate. This was clearly not on the table, anyway, as Morrisons chose to offload most of its convenience chains in these regions last year.
