Rumors have resurfaced that Amazon is eyeing a bid for Ocado to boost the chances of success for its fledgling grocery arm Amazon Pantry, sending shares of the UK delivery firm soaring and putting grocers Morrisons and Waitrose (which both have deals with Ocado) watchful. Following a Daily Mail Market Report which suggested Amazon has “advisers beavering away on a potential move for the British online supermarket”, shares in Ocado jumped 18 per cent to £2.85 per share.
It comes as Amazon looks to ramp up its Pantry offering in the UK following its launch in November. It currently allows customers to buy from a limited range of 4,000 grocery and household products, from big brands such as Kellogg’s, Ariel, Colgate and Kronenbourg, which it will then deliver. It’s looking to add fresh food items to the line-up but will need to invest in a storage and delivery infrastructure that could support it. A buyout of Ocado could provide that.
Meanwhile, investment banks have suggested that if Ocado is formally approached with an offer it should consider it, given its limited scale in comparison to Amazon Pantry (which would become a direct competitor). However, it would prove a thorn in the side of Morrisons and Waitrose, both of whom struck delivery agreements with Ocado. In 2013, Morrisons entered into a 23-year, £216m deal with Ocado in exchange for its e-commerce technology, warehouse, staff and vans. Similarly, since 2009 Waitrose has had a deal with Ocado to deliver its products.
Neil Saunders managing director at retail analysis firm Conlumino explained that the contractual agreement between Waitrose and Ocado, which runs until 2020, could yet prove a sticking point. Under the terms if Amazon were to buy Ocado it would have to pay Waitrose the greater part of £40m or four per cent of the sale price.
Morrisons certainly wouldn’t be the first retailer to sell through Amazon even though, on paper, it is a competitor. The challenge for Morrisons is that if the contractual agreement stands then it cannot set up its own rival online service, a shortsighted decision by previous management that may well come back to haunt Morrisons over the longer term, suggested Saunders.