Shares in Ocado (OCDO) rocket 43% higher to 787.9p following the announcement of a tasty partnership with US grocer Kroger, giving the online grocer-to-e-commerce tech licensor a foothold in the vast groceries market across the pond.
The news also inflicts pain on people who had been betting against Ocado via short selling as the spike in the price will have triggered margin calls, forcing them to deposit more money or close out their position.
WHAT IS THE LATEST NEWS?
Following on from similar deals to provide the Ocado Smart Platform to Canada’s Sobey’s, France’s Groupe Casino and Swedish grocery leader ICA, Ocado will license out its technology for Kroger’s exclusive use in the US, where it is a market leader with sales of $122bn in fiscal 2017.
‘The objective of this partnership is to allow Kroger to redefine the grocery customer experience in the US through the adoption of the centralised, automated model of online retailing provided by the Ocado Smart Platform’, thunders today’s statement.
Ocado, which powers Morrison’s (MRW) online delivery service in the UK, believes Kroger is the company best positioned to win in US grocery and having inked this deal, will now call off talks with other US-based retailers.
Chief executive Tim Steiner argues ‘the opportunity to partner with Kroger to transform the way in which US customers buy grocery represents a huge opportunity to redefine the grocery experience of Kroger’s customers and create value for the stakeholders of both Kroger and Ocado.
‘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.’
Kroger and Ocado are already working to identify the first three sites in 2018 for development of new, automated warehouse facilities in the US, and will identify up to a total of 20 over the first three years of the agreement.
In the event of a failure to commit to the target capacity, Kroger will shell out compensation to Ocado.
DEALING WITH DISRUPTION
Significantly, Kroger will also take a 5% stake in Ocado, worth £183m, as the pair partners up to tackle the threat from the likes of Amazon, which announced a takeover of Whole Foods last summer.
The threat of a big disruptor entering the sector has put pressure on food retailers to be on top of their game when it comes to online deliveries, and that’s playing into the hands of Ocado, with a number of deals in the pipeline now coming to fruition.
Russ Mould, investment director at AJ Bell, comments: ‘A US licensing deal helps extend the astonishing momentum displayed by internet-based groceries business Ocado since the company shifted its focus from being a simple online supermarket to a technology platform provider.
‘A significant milestone in this strategy was marked in November last year when the company announced its first overseas deal with France’s Groupe Casino supermarket brand - providing the company with the necessary kit and technology to launch its own online offering.
‘Another leg up in the share price today reflects market excitement about the size of the opportunity across the Atlantic. However, the tie-up with US chain Kroger is not expected to be immediately earnings enhancing, so the company will remain loss-making for the time being.
‘For now, at least, the market appears willing to pay up in the hope and expectation of growth in the future and not worry too much about when all these new ventures will become profitable.’
