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Morrison to Spend $1.6 Billion on Online Groceries, More Stores

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March 14 (Bloomberg) -- Wm Morrison Supermarkets Plc said it will spend 1.1 billion pounds ($1.6 billion) to start an online groceries business next year, add more convenience stores and revamp existing shops.

Morrison stock advanced as much as 5.3 percent in London trading, the biggest intraday jump since July 2009, after the Bradford, England-based company also confirmed a technology tie-up with Ocado Group Plc and reported a smaller drop in profit than analysts’ anticipated. Shares traded at 274.70 pence, up 1.1 percent, at 11:16 a.m. in London.

“Now is the right time to get into” the online grocery market, because “it’s accelarating,” Chief Executive Officer Dalton Philips told reporters today. “We see a route through to profitability,” he said.

Philips said Morrison’s investment includes starting online sales in January 2014 as well as opening 40 percent more convenience stores and continuing the revamp of its existing outlets in an effort to halt a slide in the company’s market-share. The smallest of the U.K.’s four biggest grocers is losing sales to discounters Aldi and Lidl and Tesco Plc as an economic slump curbs household spending.

“A collaboration with Ocado online is interesting,” said Andrew Gwynn, an analyst at Exane BNP Paribas in London. “These are necessary changes, but the executional risk is high at the same time, as the brand needs clarity and the offer needs to defend against the discounters.”

Ocado Discussions

Ocado and Morrison are in talks that may lead to a licensing agreement to use Ocado’s intellectual property and knowledge to help develop an online business. The discussions don’t involve Morrison buying Ocado or a stake in the company, it said. Morrison’s decision to enter the internet-based grocery market isn’t dependent on the outcome of these discussions. There is no certainty that an agreement will be reached, Morrison said.

Ocado shares rose as much as 29 percent in London, the biggest intraday increase since Nov. 19.

So far, Morrisons’ only move online for groceries has been buying a 10 percent stake in U.S. Internet grocer FreshDirect. Online grocery sales in the U.K. will double from 2012’s level to 11.1 billion pounds by 2017, according to the Institute of Grocery Distribution, while the convenience-store market will expand by 29 percent over the same time period, faster than the 18 percent growth expected from the broader sector.

Ant & Dec

Underlying pretax profit at the company fell 3.6 percent to 901 million pounds in the year ended Feb. 3. That still beat the average estimate of 13 analysts of 885 million pounds, according to a Bloomberg survey. Sales at stores open at least a year, excluding gasoline and value-added tax, fell 2.1 percent, more than the 1.7 percent decline predicted in a separate Bloomberg survey of eight analysts.

Under Philips, the company is focusing on its fresh-food offering, hiring comedians Ant & Dec to promote the provenance of its fresh meats as 100 percent British amid the horsemeat scandal in Europe.

Philips has so far remodeled about 100 outlets with in-store butchers, fishmongers, cheese counters and produce presented in wooden crates and baskets. Under the plan, Morrison sources almost half its fresh food directly from farmers and processes it in its own facilities. U.S. chain Kroger Co. has gained market share with a similar approach.

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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