By James Davey
LONDON (Reuters) - British supermarket Morrisons has launched a new service offering Amazon customers same-day deliveries of goods from its stores, deepening the relationship between the two firms but hitting shares in online grocer Ocado.
Ocado has its own distribution agreement with Morrisons and its shares fell 5 percent on concerns the extension of the Amazon partnership will mean it faces more competition.
The new "Morrisons at Amazon" service, launched on Wednesday, will allow Amazon Prime customers in and around London to order the full range of Morrisons' products online via the Prime Now app.
It builds on a deal Morrisons struck with Amazon in February that saw it begin wholesale supply to the Internet firm from June. Morrisons said that arrangement had started well and been extended to thousands of products.
The new service, which remains part of the wholesale agreement, will see orders from Amazon Prime subscribers picked by shop staff at a local Morrisons store and delivered the same day by Amazon either within one hour for 6.99 pounds or within a two-hour slot for free.
As with the existing wholesale deal, Amazon is able to charge its own prices. The new service will launch in selected districts in London and Hertfordshire, north of the capital.
It will run alongside the supermarket chain's existing online retail operation. Products ordered on the Morrisons.com website have been distributed by Ocado from its fulfillment centers around the country since 2014.
Ocado said it was looking into the implications of the latest Morrisons-Amazon agreement.
"Although we are not aware of the details, we have been assured by Morrisons that they acknowledge and respect the exclusivity provisions in our agreement, which oblige Morrisons to operate their online grocery business only through the Ocado arrangements," said a spokeswoman for Ocado.
Amazon is promoting its Prime service heavily ahead of the launch on Nov.18 of motoring show "The Grand Tour" presented by former Top Gear front man Jeremy Clarkson.
Shares in Morrisons, up 50 percent this year as a turnaround under new boss David Potts gains pace, were little changed.
Morrisons is the smallest of Britain's "big four" supermarkets which have come under pressure from the rise of German discounters Aldi and Lidl.
However, the online food market is expanding quickly and is expected to grow by 68 percent to 17.9 billion pounds in the five years to 2021, according to industry research group IGD.
Morrisons said its partnership with Amazon will contribute to a 50-100 million pounds profit boost it has previously targeted.
"For Morrisons this broadens the offer and gives them more ways to reach customers online where they are still in the early stages of development. For Amazon this is one of a vast number of things they are trialling," said Bernstein analyst Bruno Monteyne, who has a "market perform" rating on Morrisons.
Morrisons renegotiated its deal with Ocado in August to extend home delivery to its customers across the country using its own stores to provide products. Morrisons has said it will commence that service next year.
(Editing by Susan Fenton/Keith Weir)