Ocado Group PLC (LON:OCDO) saw its shares jump today on news it is to develop an online grocery business in Canada in partnership with the country's second largest food retailer, Sobeys Inc to use the Ocado Smart Platform, a deal which it expects will create “significant long term value to the business.”
In a statement, the FTSE-250 listed online grocer noted that Sobeys - which is owned by Toronto listed Empire Foods Limited (TSE:EMP.A) - operates more than 1,500 stores across Canada, generating sales of C$23.8bn in fiscal 2017.
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In early morning trade, Ocado shares were up nearly 12%, or 49p at 462p.
It said Sobeys and Ocado will develop their first Customer Fulfilment Centre (CFC) in the Greater Toronto Area, the build of which is expected to take approximately two years.
In addition to this initial CFC, Sobeys and Ocado will consider developing other CFCs in Canada's dense urban areas.
Luke Jensen, CEO of Ocado Solutions, commented: "Channel shift to online in North America is gaining pace as consumers increasingly seek the benefits of grocery shopping from the comforts of their own homes, and as retailers attempt to offer services to meet this growing customer trend.”
Ocado will provide a comprehensive and customized suite of support and engineering services to enable a smooth launch and sustainable ecommerce operations.
Sobeys and Ocado will also partner to incorporate ongoing learning and innovation from Ocado's global experience into the Canadian business.
In consideration of the investments made by Ocado, including maintenance and access to technology, Sobeys will pay Ocado certain upfront fees upon signing and during the development phase, then ongoing fees linked to installed capacity within the CFC and service criteria.
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Ocado expects the transaction to be earnings neutral in the current financial year with the costs of establishing the partnership, integrating Ocado Solutions' software platform with Sobeys systems and further investments in our capabilities, offsetting the initial fees payable.
Ocado expects to incur additional capex of £15mln in the full year 2018 financial year to support this partnership and accelerate the development of its platform, with further capex in future years.
However, it added, in full year 2019 and beyond the profitability of Ocado Solutions is likely to grow as the fees from the transaction increase, and as other deals are signed.
The latest deal is a third international partnership for Ocado’s Smart Platform following on from late November’s announcement of an agreement with France’s Groupe Casino and the first deal revealed with an unnamed partner last June.
Ocado confirmed last week that, in order to provide greater clarity on the split between Ocado Retail and Ocado Solutions, it will be introducing segmental reporting of sales and EBITDA from the publication of full year 2017 results.
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