Morrisons has signed a wholesale deal to supply McColl’s 1,300 convenience stores and 350 newsagents. From January 2018, the partnership will see the grocer provision the sites with fresh food and groceries– including Safeway-branded goods exclusively for 12 months.

As well as greatly increasing its fresh food credentials, Jonathan Miller, chief exec of McColl’s, said: “In McColl’s, Morrisons gain a long-term partner of significant scale with a growing neighbourhood convenience estate and in Morrisons we gain access to their best in-class sourcing and manufacturing capabilities.

“This will enable us to provide our customers with the highest quality fresh food through the relaunch of the much loved and trusted Safeway brand,” added Miller. “This is a defining moment for McColl’s and builds on the transformational deal we announced last year to acquire 298 high quality convenience stores.”

A step towards convenience

Molly Johnson-Jones, senior analyst at GlobalData, believes this move by Morrisons is a sign the grocer is ready to move back into the convenience market.

“MLocal stores were sold in 2015, after a failed effort to participate in the growing convenience market, but this clearly has not put it off,” explained Johnson-Jones. “The convenience market is the fastest growing segment of the UK food retail market, and given the lack of growth opportunities elsewhere, we see the convenience market as an essential segment to be competitive in.”

She added: “With Tesco and Sainsbury’s experiencing the benefits of being convenience players it makes sense for Morrisons to be reviving the Safeway brand with a view to supply independents.”

Nick Gladding, senior business analyst at IGD, said the deal will make an initial profit contribution for Morrisons in the 2018/19 financial year, while helping the grocer in its journey towards delivering £50 million-£100 million incremental profit as set out by its CEO, David Potts.

“The deal will accelerate the growth in the contribution of wholesale activities to Morrisons like-for-like sales. In Q1, wholesale topped up Morrisons retail LFL sales by 0.4% as it begun to benefit both from last year's agreement to supply own brand products through Amazon and from the rollout of Morrisons Daily shops in partnership with forecourt operator Rontec,” said Gladding.

“The deal will also allow Morrisons to make better use of capacity at its 17 UK food processing plants. Morrisons now expects wholesale revenues (including tobacco) across all of its partners to reach £700 million by the end of 2018, putting it well on track to reach its longer term £1 billion target.

The trend of supply chain tie-ups

In the announcement, CEO of Morrisons, David Potts, said the McColl’s deal will make the grocer a “broader, stronger business”.

He said: “This new partnership is a further example of Morrisons leveraging existing assets to access the UK’s growing convenience food market in a capital light way.”

Johnson-Jones agrees, she described how the deal would make the most out of Morrisons' existing supply chain. “Given that its vertically integrated supply chain is not operating at full capacity and producing more products would only incur small fixed cost increases.”

Back in early 2016, Morrisons revealed its supply chain partnership with Amazon, in a move to increase grocery product choice for Amazon Prime Now and Pantry customers.

At the time, Essential Retail pointed to the strength of the Morrisons supply chain and how it might leverage this to provide other third-parties in the future.

BT Expedite – now Aptos – also noted how the Amazon-Morrisons deal could begin a trend where other retailers may "jump on that bandwagon" by identifying the benefits of using an existing third-party technology infrastructure to support new distribution channels.

And you don’t need to look far to see other retailer tie-ups which are now focussing on the strengths of their supply chains, from Sainsbury’s reported interest in Nisa, to the ongoing negotiations between Tesco and Booker.

Speaking, to Richard Willis, VP Solutions Management EMEA at Aptos, today, he said it is this convenience shopping trend which is driving these partnerships.

“Convenience shopping is an increasingly important trend in today’s retail landscape and recent high-profile deals (McColl’s/Morrison’s, Tesco/Booker) are proof that larger grocers are equipping themselves to respond to changing consumer behaviour. Amazon’s success is largely driven by convenience, so competitors are ensuring that they stay agile and play to their strengths,” he said.

“Hypermarkets have had their day while small train station and airport stores are booming. We’re seeing the rise of the convenience store because it gives consumers the balance of ordering some produce online, while getting the really fresh necessities locally.  Large grocery stores are realising that if they do not adapt to accommodate new convenience-focused shopping habits, they risk falling profits or empty selling space.”

A changing landscape

Catherine Shuttleworth, CEO of Savvy, also doesn’t think this third-party trend is likely to die down anytime soon as “supermarket retailers begin to flex their business models into wholesale supply of other retailers, food service organisations and potentially overseas players”.

She also pointed to the proposed Tesco-Booker deal. “This has opened up the market with likely structural change ahead as supply arrangements become realigned and existing wholesaler organisations see their futures significantly differently,” she said.

“As the convenience retail market continues to grow in sales terms, the many players in the market both retail and supply are about to undergo major change which we believe will lead to significant consolidation.”