AMAZON'S GLOBAL PRESENCE GETS LARGER

Amazon's arrival could let Morrisons off the hook online

• Christopher Williams Chief Business Correspondent  

1 March 2016 • 1:44pm

Morrison's customers are less likely to be big online spenders

So Amazon’s long-awaited attack on the UK’s supermarkets has arrived, in the form of a wholesale deal with Morrisons. The smallest of Britain’s Big Four grocers will feed the leviathan with a selection of a few hundred own-brand products, presumably those that Jeff Bezos’ all-powerful algorithms have decided will be most likely to sell to Amazon Prime customers.
At the same time, Morrisons is attempting to tweak its existing deal supplying Ocado so that its own online outlet, Morrisons.com, is able to expand. Discussions are ongoing to allow it to occupy some space in Ocado’s vast warehouse at Erith, near Dartford in Kent, and also pay Ocado to provide in-store picking technology, such that for the first time Morrisons.com will be able to serve households anywhere in the country.
The news of Amazon’s incursion, limited as it is, has been seen as bad news for everyone but Morrisons. Tesco and Sainsbury’s shares dipped, and Ocado’s plummeted 8pc. Investors who vainly hoped the American giant might be willing to pay the 90 times earnings multiple on which Ocado trades got a wake-up call. The company’s own hints of a big international partnership now look, charitably, premature.
Ocado’s company’s £1.5bn market capitalisation might be peanuts compared with $262bn (£188bn) Amazon, but Bezos did not get where he is today – on his way to the Moon, apparently – by paying more than he had to for assets. The Ocado circus will have to stay on the road for the foreseeable future, and now compete with Crazy Jeff’s Big Top.

Jeff Bezos' companies are famously thrifty Credit: Daniel Berman/Telegraph

For Morrisons, the deal with Amazon has been universally hailed as a victory and the shares, already on a good run since mid-December, rose 6pc. Bernstein analysts suggested that if Amazon’s wholesale business grows to £500m in two years – a big assumption, they admit – then earnings per share for 2017/18 would get a 12pc boost. That would obviously be warmly welcomed by the shareholders.
The supermarket’s chief executive, David Potts, labelled the arrangement deal “low risk and capital light”, which is surely true, at least in the short term. Morrisons has already invested in its food manufacturing business, so gaining a big new customer should boost the bottom line straight away. Excess capacity in the system created by Morrisons’ failure to do a supply deal with the new owner of its former convenience stores can be used.
In the longer term, Potts must wonder about Amazon’s intentions. Is it using Morrisons for its own capital-light, low-risk market test? Once it has the measure of British grocery habits, could it jettison Morrisons and launch an all-out assault on the traditional food retailers? Perhaps Potts decided that in the supermarket industry’s parlous state he does not have the luxury of paranoia. The partnership is a prize, regardless of Amazon’s secret strategising.
The positive market reaction to such a calculation is easy to understand. It is more difficult to comprehend why the attempted tweaks to Morrisons’ deal with Ocado have also been so roundly applauded.
The supermarket has extracted more value from the arrangement by getting national coverage and access to a state-of-the-art warehousing facility for little capital outlay, but it has not answered the basic question of whether there is an enduring role for Morrisons as a food delivery service. In fact, it has only made it more fundamental.
Morrisons’ core customers are not the natural, profitable market for delivery. Money is made online from wealthy families that do big weekly or fortnightly shops of premium brands. This is not the Morrisons stronghold and the competition for them is fierce. Consumers have been trained to have extremely high and rising expectations online, not least by Amazon.
Battling over these households probably seemed absolutely imperative for supermarkets five years ago. Now industry grandees are highly sceptical about the long-term prospects online. One former senior executive said recently that he expects two of the Big Four to pull out of home delivery in the next few years.

Morrisons chief executive David Potts

Potts, who has shown he is capable of taking painful but necessary action since his arrival a year ago, would be better to grasp that nettle soon. There is a strong argument that Morrisons should shut down Morrisons.com and find a way to pull out of its absurdly long contract with Ocado rather than extract admittedly valuable concessions from its under-pressure partner.
That could allow Morrisons to reinvest in facing the bricks-and-mortar challenge from the expanding German discounters Aldi and Lidl, which don’t bother with fresh food online. The relationship with Amazon would meanwhile provide Morrison’s will the exposure it needs to the minority of households who do most of their grocery shopping online.
It would also not face potentially conflicting interests. As things stand, if Amazon becomes a major player in online groceries it becomes a threat to Morrisons online. There are not many British supermarket executives who relish the thought of all-out battle with Bezos and his profitless growth model, despite the claims of Ocado that the potential growth of the market would be welcome.
It is possible that Amazon has little impact, of course. It is a company that fails in a lot of the markets it enters. The failure of its smartphones and the voucher website Living Social show that the company makes some big bets that do not pay off. It’s hard to tell how Amazon Fresh, its US groceries business, has fared, but the roll-out has been slow. Perhaps Potts plans to wait and see, but Morrisons has at least now got options online.