Morrisons signs deal to sell food to Amazon customers

Morrisons will supply groceries to Amazon customers in the UK under a new deal with the US online giant.

The supermarket said it will supply products for the Amazon Prime Now and Amazon Pantry services.

Amazon Pantry was launched in the UK last year, escalating competition with the big four supermarkets, but did not offer fresh food.

Under the new deal, Morrisons will supply fresh, frozen and non-perishable goods to Amazon customers.

The expanded Amazon service will be available later this year.

Analysts at Shore Capital said there was "strategic merit" in Morrisons exploring a commercial tie-up with Amazon.

Ocado has a 25-year agreement with Morrisons to run the supermarket's online delivery service.

The supermarket also said it will expand the geographical coverage of Morrisons.com by taking space in Ocado's distribution centre in Erith, southeast London.

However, Morrisons said of the Erith deal: "This amended agreement is subject to detailed terms being agreed and will only proceed if it enables Morrisons to achieve profitable growth online. There can be no certainty that an agreement will be concluded."

Shares in Ocado sank 7.77%, while Morrisons' shares rose 5.91%.

Tesco shares were also down 2%, with Sainsbury's falling 0.63%.

This agreement will sound a warning to the big on-line grocers that Amazon means business as a destination for UK online grocery shopping.

It currently has a small food delivery business but it has big ambitions and this tie-up is an important step in realising them.

Morrisons was relatively late to online delivery so have little to lose to the new entrant as they only have 3% of the market themselves but it may worry Tesco which has over 40%.

Morrisons will also gain an important new channel for its food manufacturing business and will at a stroke essentially become a food wholesaler to Amazon.

It could cloud the relationship Morrisons has with Ocado who currently supply delivery services. Morrisons chief executive, David Potts was already unhappy with the deal struck by his predecessor, Dalton Philips, as the Ocado network doesn't serve key areas such as the North and Scotland - Morrisons heartland.

There is a crumb of comfort for Ocado in that Morrisons has agreed to take up capacity in Ocado's new fulfillment centre in Erith - a move it had been delaying.

Ocado will also provide logistics to send online orders to be picked and delivered locally from Morrisons stores in the North.

However, those concessions will be eclipsed by the boost this deal give's Amazon's designs on the UK grocery market.

David Potts, chief executive of Morrisons, said: "This is a low risk and capital-light wholesale supply arrangement that demonstrates the opportunity we have to become a broader business. We look forward to working with Amazon to develop and grow this partnership over the coming months."

Independent retail analyst Nick Bubb commented: "As Morrisons and Ocado seem to be locked in a loveless marriage (much like Waitrose and Ocado), it seems appropriate that they have chosen Leap Day (when by tradition a woman can propose to a man) to announce a strange new agreement, to help them both grow more profitably.

Tim Steiner of Ocado tells us all that 'this is a win-win arrangement', but we will have to see whether the two companies eventually end up in the divorce courts."