Online retailer Amazon is set to enter the British fresh food market after striking a supply deal with Bradford-based supermarket Morrisons, potentially ramping up competition in the already cut-throat sector.
Morrisons, the fourth biggest supermarket in the country, said the deal would allow Amazon Prime Now and Amazon Pantry customers access to Morrisons ambient, fresh and frozen products in the coming months.
The supermarket sector has been ravaged by a price war, as the big four - Tesco, Sainsbury’s, Leeds-based Asda and Morrisons - face increasing competition from German discounters, Aldi and Lidl, leading to their market share shrinking.
Analysts have warned that a step up from Amazon could hurt the traditional players even more.
In November Amazon launched a packaged groceries offer for Amazon Prime members, who pay an annual fee of £79.
That was its most ambitious foray into UK’s growing online grocery market but it stopped short of replicating its broader U.S. Amazon Fresh service, which offers about 20,000 chilled, frozen and perishable products and items from local shops.
Retail analysts have speculated the US online giant was gearing up for a launch of Amazon Fresh in Britain this year.
David Potts, chief executive of Morrisons, said: “The combination of our fresh food expertise with Amazon’s online and logistics capabilities is compelling.
“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.”
The Bradford-based grocer already has an online supply deal with retailer Ocado and said it had reached agreement in principle with Ocado to grow Morrisons.com.
The deal will see Morrisons take space in Ocado’s new distribution center, or customer fulfillment center (CFC), in Erith, South East London, and Ocado deliver a store pick solution for Morrisons that leverages its technology and Morrisons’ stores.
When implemented the deal would expand Morrisons’ online reach to the whole of the UK.
The amended agreement is subject to detailed terms being agreed and will only proceed if it enables Morrisons to achieve profitable growth online.
Morrisons’ announcement comes after supermarket Sainsbury’s upped the ante in the highly-competitive grocery sector last month when it tabled a £1.3bn bid for Argos-owner Homebase in an attempt to become a “world-leading” retailer bigger than John Lewis and Amazon UK.
But the proposed deal faces competition, with South African-based furniture retailer Steinhoff making a rival offer for Home Retail Group at £1.4 billion.
Amazon heaped more pressure on the British grocery market in November last year when it launched a grocery service for Amazon Prime members with thousands of products.
Amazon Pantry delivers groceries and household products to subscribers for a fee of £2.99 per box.
It comes as the British grocery sector continues to be locked in a supermarket price war, which has seen the Big Four supermarkets slash their prices to protect market share from the rise of German discounters Aldi and Lidl.
Meanwhile, Morrisons also said it was pressing ahead with plans to bolster its website after agreeing a deal in principle with online grocery retailer Ocado.
The supermarket said it would take up space at Ocado’s new customer fulfilment centre in Erith, south east London, in a move to “sell to customers all over Great Britain”.
It comes after the grocer signed a £170 million contract with Ocado in 2013, providing the Bradford-based supermarket with its first online delivery service.
Morrisons, which runs just under 500 stores, last month reported a 0.2% rise in sales at established stores, excluding fuel, in the nine weeks to January 3 in a marked turnaround after recent hefty sales declines.
It was followed by a fresh drive by the supermarket at the beginning of February to snap up more customers by cutting the prices of more than 1,000 products.
Morrisons shares were up more than 4% in early trading.
Shore Capital analyst Clive Black said the tie-up with Amazon was “potentially quite inspired by David Potts”.
He added: “It is highly complementary to the business in its current form. We have heard it said by some that Mr Potts may be more of a retailer than a strategist; such folk may need to think again.”