Ocado Soars to Record as It Cracks U.S. With Kroger Deal

Ocado Group Plc soared to a record after Kroger Co. agreed to buy a stake in the U.K. online grocer, which is breaking into the U.S. market with a landmark deal to license its home-delivery technology to the supermarket chain.

Ocado’s first U.S. licensing pact marks Kroger’s response to Amazon.com Inc.’s purchase of Whole Foods Market Inc., which extended the e-commerce giant’s reach into bricks-and-mortar retailing. Ocado rose as much as 51 percent in early London trading.

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Ocado shares

Source: Bloomberg

“Kroger is one of the few national retailers in the U.S.,” Ocado Chief Financial Officer Duncan Tatton-Brown said on a call with reporters. “We are confident we have picked the right partner.”

The deal, Ocado’s biggest to date, marks the latest tie-up among grocers as online competition heats up and pricing pressure squeezes profit margins. In the U.K., Tesco Plc has acquired wholesaler Booker, while J Sainsbury Plc has agreed to buy rival Asda from Walmart Inc., which is taking over Indian e-commerce provider Flipkart. Several French retailers have formed purchasing alliances.

Kroger will become the exclusive user of Ocado’s technology for distributing groceries and food, according to a statement Thursday. It also agreed to buy new shares in the U.K. company, taking a stake of about 5 percent. The companies are working on identifying sites for three automated distribution centers in the U.S. this year and may open as many as 20 within three years.

The number of distribution centers Kroger is committing to is “materially ahead of anything we had expected,” wrote Bruno Monteyne, an analyst at Sanford C. Bernstein.

Second-Biggest Grocer

With sales last year of $122 billion, Kroger is the second-biggest grocer in the U.S. behind Walmart, according to Bloomberg Intelligence. After years of trying without success, Ocado is transforming itself from an online retailer into a technology provider. The company struck its first major licensing deal with Casino Guichard-Perrachon SA of France in November, which was followed by agreements with Sobeys Inc. of Canada and Sweden’s ICA Gruppen AB.

“We have the capacity to sign more deals,” Tatton-Brown said, adding that this agreement “makes a point: If you want to sign with us, you have to get on with it.”

Ocado’s services are in demand because storing and delivering groceries is more complex than selling books or video games, given the risk of food spoiling.

Kroger will pay undisclosed monthly exclusivity and consultancy fees to Ocado.