- Shares rally on agreement with Asian grocery giant
- Deal ‘validates’ the company's model say analysts
- Fee structure implies greater capital spending
Investors responded with enthusiasm to the news online grocery delivery firm Ocado Group (OCDO) had signed a strategic deal with one of Asia’s largest retailers.
Shares in the FTSE 100 firm, which already provides fulfilment solutions to a dozen of the world’s largest grocery chains, jumped 36% to 642p.
WHAT IS ALL THE EXCITEMENT ABOUT?
Ocado announced it had signed an agreement with South Korea’s Lotte Shopping (023530:KRX) to develop a network of CFCs (customer fulfilment centres) covering ‘multiple geographies’ and addressing ‘a wide range of online grocery missions’.
Lotte Shopping is the largest retail division of the Lotte group, which covers chemicals, food, hotels and retail, and operates more than 1,000 department stores, hypermarkets and supermarkets in South Korea with an annual turnover of KRW 15.6 Trillion or £9.5 billion.
The agreement plans for the development of a nationwide network of six CFCs by 2028, using Ocado’s Smart Platform technology, with the first centre due to go live in 2025.
The new centres will be the first to feature OSP grids on multiple levels, which will improve efficiency immensely and takes account of the need to minimize the building’s footprint in densely-built areas.
There is no mention of the potential revenue impact from the deal, with Ocado simply saying the fee structure agreed with Lotte is ‘similar’ to that agreed with other international OSP partners with Ocado receiving an up-front payment from Lotte but taking on most of the costs itself and getting repaid through a revenue-share agreement.
NOT EVERYONE IS SO ENTHUSIASTIC
Analysts at Numis described the news as ‘further important validation of the Ocado model’, with the fact it involves South Korea, one of the most developed e-commerce markets in the world, adding credibility to the firm’s offering.
Clive Black, vice chairman and head of consumer research at Shore Capital, and a long-time bear of Ocado, was less taken with the news.
‘It would be churlish not to welcome the fact Ocado Group has added another market and another client to its Solutions activity’ says Black.
‘However, the business is chronically capital intensive, displays virtually no positive operational gearing, has made very negative capital returns and despite all the technobabble does not make any money’, he concludes.
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