‘The scale and economics of this agreement are totally different to our other deals,’ – Ocado finance director Duncan Tatton-Brown.
Scepticism has shrouded Ocado since the company joined the London Stock Exchange (LSE) in 2010. The company has struggled to mount any serious challenge in the UK grocery market, and currently has about 580,000 active customers to represent just a 1.2% share (up just 0.1% from a year ago). Since Ocado shifted its strategy toward its technology in 2015, it has failed to convince investors that it could successfully roll-out and monetise it.
Read more about whether there is a renaissance for Tesco and the supermarket’s share price
Ocado’s unique technology centres on its end-to-end system that can be used by online retailers to manage their supply chain. This is coupled with purpose-built warehouses, or ‘customer fulfilment centres’ (CFCs), combining both software and hardware to create a largely automated distribution centre.
Ocado builds centres on behalf of clients and, when built, the company then charges ongoing fees for servicing and consultancy work. It then earns revenue based on the gross value of the goods that go through the centres, income rising when its client’s does.
Learn more about how a Sainsbury’s and Asda’s merger will shake up the UK grocery market
The company has managed to sign a string of deals for its Ocado Smart Platform and CFCs over the past seven months, and has now unveiled the biggest deal to date. While a deal with Kroger, one of the world’s largest grocers and the market leader in the US, was on the cards and anticipated by shareholders the agreement is massive compared to what anyone expected. Previous deals have seen clients take a more gradual approach to Ocado’s offering, taking one CFC before committing to others, but Kroger has demonstrated confidence in the firm by committing to at least 20 CFCs, eclipsing all the other deals Ocado has secured so far.
The Kroger deal is a transformative moment for Ocado, but the firm still has some way to go. It will now have to prove it can deliver the deals it has signed and move toward sustainable profitability. So what does the deal mean for Ocado, and where is the company heading next?
Ocado strikes major deal with US retailer Kroger
‘As we work through the terms of the services agreement with Kroger in the coming months, we will be preparing the business for a transformative relationship which will reshape the food retailing industry in the US in the years to come,’ – Ocado chief executive and co-founder Tim Steiner.
Ocado has struck a deal to open a swathe of new CFCs across the US, which will then be used by Kroger to manage its distribution operations using the Ocado Smart Platform. The multiple sites will be managed under a centralised model and will be automated.
The financial details of the deal still need to be ironed out and whilst the deal clearly outweighs the others it has signed with other clients, Ocado shareholders will still be eager to find out just how valuable the partnership is to the business and, more importantly, when that value will start to trickle through to its financial results.
Ocado Group strikes biggest partnership yet with Kroger: the details of the deal
- Kroger and Ocado are to identify 20 CFCs over the first three years of the deal
- Work on where the first three sites will be located has already started and should be complete by sometime in 2018
- Kroger will pay monthly exclusivity and consultancy fees to Ocado
- The pair will sign an overall services agreement to facilitate the phased approach to developing new CFCs across the US, based on standard terms for Ocado’s platform
- Kroger will pay compensation to Ocado if it fails to commit to the 20 CFCs targeted
Kroger purchases 5% stake in Ocado Group as part of major partnership
The other major element of the agreement will see Kroger take a 5% stake in Ocado. Kroger will purchase 33.1 million new Ocado shares for £183 million, implying a value of £5.52 per share. That price roughly matches the price of Ocado shares before the partnership was announced, meaning Kroger will automatically see the value of its stake in Ocado rise if it pays that price following the spike in Ocado shares since the deal was unveiled.
Ocado share price climbs to all-time high after Kroger deal
During its earlier days when it was more focused on its online grocery delivery operation, Ocado shares struggled to gain ground. By late November 2017 Ocado shares were standing at 238.7p before starting its journey upwards after unveiling the deal with Groupe Casino.
The Ocado share price found further ground as each new deal was announced and prior to unveiling the Kroger deal, shares had closed at £5.54. Shares then spiked to an all-time high of £9.97 on the day of the announcement, before dropping back down to close at £7.96. Shares have since found stability above the £8 mark, and the company could see itself become part of the FTSE 100 at the next quarterly review.