By James Davey
LONDON (Reuters) - Britain's Wm Morrison Supermarkets <MRW.L> plans to launch an online food business within a year, possibly with the help of specialist Ocado <OCDO.L>, as it battles to catch up with rivals after posting its first profit fall for six years.
Britain's fourth-biggest grocer has been losing market share, hit by its lack of exposure to fast-growing online and convenience store markets as well as competition from discounters Aldi and Lidl.
Though Morrisons does sell non-food items online it has held back from selling food because of doubts over the profitability of delivering complex grocery orders to customers' homes. Ocado has yet to make a pretax profit in a decade of business.
Rivals like market leader Tesco <TSCO.L> and number three J Sainsbury <SBRY.L>, however, say their online customers tend to be their most loyal, also spending heavily in stores.
"Much needs to be done, but at least Morrisons has joined the party," said Panmure Gordon analyst Philip Dorgan.
Britain's online food market is currently growing at around 16 percent, and is set to almost double in value over the next five years to 11 billion pounds, Morrisons said.
The group said on Thursday it would launch an online grocery business by January 2014. Details were sketchy, but it could involve tapping the technology and operating expertise of Ocado.
The two companies said they were in talks, but that these did not involve Morrisons buying all or part of Ocado and that they would not affect Ocado's existing deal with upmarket grocer Waitrose <JLP.UL>, which provides many of its products.
"This is one of the options open to us and our decision to enter the market is not dependent on the outcome of these discussions," said Morrisons Chief Executive Dalton Philips.
For Ocado, whose shares jumped 22 percent, a deal with Morrisons would be a major breakthrough.
"We always saw the potential to monetise the intellectual property we have and this would be, if we reached an agreement, part of the journey," its finance director, Duncan Tatton-Brown, told Reuters.
Tom Ewing, portfolio manager of the Fidelity UK Growth Fund, said it made more sense for Morrisons to leverage Ocado's expertise than spend years on an expensive alternative.
"Morrisons has spent the last 18 months looking at different online models and indeed invested in a venture based in New York. The fact that a tie up with Ocado is on the cards speaks volumes about the relative attraction of the model," he said.
Shares in Morrisons, down 10 percent over the last year, were up 0.7 percent at 273.6 pence by 02:25 p.m. British time.
NEED FOR CHANGE
Bradford, northern England-based Morrisons' results for the year to February 3 showed the need for change. The group made an underlying pretax profit of 901 million pounds, in line with analyst forecasts but down from 935 million the year before.
Though turnover rose 3 percent to 18.1 billion pounds, sales at stores open over a year fell 2.1 percent. That performance "was not as good as it should have been," said Philips, who expects like-for-like sales to remain negative this fiscal year.
Morrisons did, however, raise its dividend by 10 percent to 11.8 pence a share, and Philips said he had investors' support.
Many of Britain's grocers are finding the going tough, despite their focus on essential goods, as consumers cut back due to fears over job security and a squeeze on incomes.
In a bid to reverse its loss of market share, Morrisons is revamping its traditional supermarkets and has stepped-up investment in convenience stores. It said its first 12 "M local" stores were performing well and, having recently acquired 62 sites from the administrators of Jessops, HMV and Blockbuster, is targeting 100 stores by the end of the year.
Philips said Morrisons, which unlike rivals produces a lot of the products it sells, was starting to do a better job of telling customers how its offer was better by, for example, highlighting its more than 5,000 trained butchers, bakers and fishmongers, and doing more to make its promotions stand out.
Morrisons will invest about 1.1 billion pounds in its 2013-14 financial year, including 150 million pounds on "multi-channel" development, like convenience stores and the internet. It has, however, cut its 2013-14 target for new traditional supermarket space to 0.5 million square feet.
Ocado separately reported a 14.4 percent rise in sales for the 12 weeks to February 24.
(Additional reporting by Rhys Jones; Editing by Kate Holton and Mark Potter)