TSCDY Tesco PLC (PK)

LONDON—Amazon.com Inc. has struck a deal with the U.K.'s fourth-largest grocery chain WM Morrison Supermarkets PLC, taking the Internet retailer a step closer to becoming a serious player in Britain's ultracompetitive online grocery market.

In coming months, "hundreds of Morrisons products" will be available to customers of Amazon's one-hour Prime delivery and Pantry services, the grocer said. Amazon added that the deal includes products including soup, chocolate, spaghetti and orange juice.

"The Amazon deal is a reminder that the world's biggest online retailer is targeting grocery in the U.K.," Exane BNP Paribas analyst John Kershaw said.

The Bradford-based grocer's shares were up 4.5% in morning trading in London. Shares of rivals Tesco PLC and J Sainsbury PLC were down 3.1% and 1.3% respectively.

Amazon's moves to build its presence in the U.K. come as the country's online-grocery market continues to boom, with penetration higher than in most other developed countries. According to the Institute for Grocery Distribution, a U.K. nonprofit organization focused on research and training for the grocery sector, 27% of British shoppers last year said that they shop online for their groceries monthly, compared with 22% in 2010. IGD estimates that online purchases will nearly double in value by 2020 to become a £ 17.2 billion ($23.86 billion) market, making it the fastest-growing channel.

Amazon has been making incremental moves to strengthen its foothold in the U.K., saying in September that it was expanding its same-day delivery service here to include items like butter and cheese, on top of its existing nonperishable goods such as toilet paper, diapers, water and coffee.

The Seattle-based online retailer has long been widely expected to launch a full grocery service in the U.K., which is already home to fierce competition online among mainstream grocers such as Tesco, Sainsbury's and Wal-Mart Stores Inc.'s U.K. business Asda—all of which offer home delivery and "click and collect" services. The mainstream grocers have been losing market share to discount supermarket chains Aldi and Lidl, neither of which offer home delivery as yet.

Bernstein analyst Bruno Monteyne said that Monday's deal provides a solution to Amazon's main hurdle in becoming a proper online food retailer: access to a fresh food supply chain." However he added that "Amazon's entry into the U.K. is more targeted than many people realize and is not a substitute for supermarkets."

Amazon's Prime Now option is available to members of the retailer's Prime service in London, Birmingham, Newcastle, Manchester and Liverpool, who can order over 15,000 items for one-hour delivery costing £ 6.99, or choose two-hour, same-day delivery slots free of charge. Amazon Pantry, meanwhile, is available across the country to Prime customers, who can order more than 5,000 everyday items such as diapers, detergent and mouthwash for one-day delivery. Customers pay £ 2.99 for their first box and 99 pence for every additional box.

In the U.S., Amazon has been pushing to expand sales of food online through its Fresh grocery delivery, available in a handful of cities, which allows customers to get fresh fruit, milk and other goods on their doorsteps.

Separately on Monday, Morrisons said that it has agreed on the broad terms of a deal with online-only grocer Ocado Group PLC, whose technology and equipment Morrisons has licensed since 2013.

Morrisons will take space in Ocado's new warehouse, currently under construction in southeast London. Ocado will give Morrisons the software needed to fulfill online orders from stores that aren't serviced by an Ocado warehouse. The deal—which would allow Morrisons to sell to customers all over Britain—is being finalized and could still fall apart.

However, Ocado's shares were down 8.1% in recent trading as investors reacted to Morrisons' announcement with Amazon. "Investors are reminded of Amazon's broader threat and Ocado must be irked that Morrison has found an alternative 'wholesale' distribution that isn't 'owned' by Ocado," Mr. Kershaw said.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

February 29, 2016 06:35 ET (11:35 GMT)

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