Morrisons to take wholesale supply past GBP1bn with McColl's deal

Morrisons has inked a wholesale supply deal with convenience store chain McColl's 1,650 shops from January, which it expects to make a small contribution to profit next year.

McColl's will eventually move its entire grocery supply to Morrisons, taking both national brands and Safeway products, the brand that Morrisons last year revived 11 years after shelving it post a £2.9bn takeover.

Morrisons said the deal will take its wholesale supply sales to more than £1bn "in due course", with a phased programme beginning in January.

By the end of 2018, the FTSE 100 company expects to see total annualised wholesale sales from all its wholesale partners, which includes Amazon, to be in excess of £700m including. tobacco.

"We expect this new initiative to make an initial profit contribution in 2018/19, and increase thereafter," Morrisons said.

Chief executive David Potts said: "We are very pleased to partner with McColl's, and look forward to developing a long and successful relationship together. We are also pleased to be reviving the Safeway brand which we know customers will enjoy.

"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. Wholesale supply will help make us a broader, stronger business."

Last November, Potts revealed that the company was developing a range of convenience products for wholesale to independent retailers, using the Safeway brand.

Although Potts made selling the company's convenience arm one of his priorities when he took over -- and completed the sale in September 2015 -- the company has continued to work closely with this subsector of the grocery market via partnerships and wholesale contracts, most notably being signed up by Amazon in February last year and expanded not in November.

In March, Morrisons reported an underlying profits before tax for the first time in five years.

House broker Shore Capital noted that wholesaling "forms a key part" of Potts’ strategy to broaden the business in a capital light manner, with a plan to eventually deliver £50-100m of incremental profit stream outside the core supermarkets.

Analysts left their current year forecasts unchanged but nudged up 2019 pre-tax profit estimates by £5m to £407m and earnings per share by circa 1% to 11.9p.

"We see this as an excellent development, which sweats existing assets and further bolsters the growth, the cash flows and returns of Morrisons, so supporting our broader investment thesis on a stock that has the capability to be durably shareholder friendly."