Ocado Group PLC (LON:OCDO)’s 2012 annual report showed rising gross sales, by almost 12% over 2011, dragged down by high cost of sales, high distribution expenses, and increasing administrative expenses. The deal with Morrison may prove to be beneficial as the company seeks to validate its business model. In a company press release, CEO Tim Steiner stated “we see Morrison’s decision to adopt our model to drive its online launch as a further endorsement of our technological and logistical excellence.”
According to Reuters, with this deal, Morrison is investing $306 million in the online grocery business, which is growing at about 16% a year and, in the U.K., is expected to double in the next five years to about $17 billion. Analysts at Credit Suisse estimate that Morrison’s initial payment should generate about $759 million in online sales. In addition to the initial $306 million payment, Morrison will pay Ocado annual service costs, a contribution for R&D expenses, and 25% of its annual earnings before interest and tax for 15 years.
With the popularity of online grocery shopping in the U.K. on the rise, it makes sense for Morrison to enter this market and compete for online shoppers along with Tesco Corporation (USA) (NASDAQ:TESO) and J Sainsbury plc (LON:SBRY). Both Ocado and Morrison can benefit from their arrangement. The rise in their share prices upon announcement of the deal shows that investors agree and believe this collaboration could be rewarding for both companies.
The article U.K. Grocers Take Their Business Online originally appeared on Fool.com and is written by Eileen Rojas.
Eileen Rojas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Eileen is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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