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Ocado and Kroger looking to transform US grocer sector

By 2021, they hope to have 20 giant, automated warehouses up and running that can pick and pack shopping in just five minutes
Kroger trolley handle
Forget the trolley, the week's shopping will be delivered to the front door

This is a big deal, said City broker Numis of Ocado PLC’s (LON:OCDO) £183mln tie-up with US retail giant Kroger Co (NYSE:KR) - though it’s doubtful the investing public really needed to be told with the share price up almost 70%.

Earlier, jaws dropped as the UK online grocer signed a technology and fulfilment deal with America’s largest chain of supermarkets; a company that generated US$122bn in revenues last year.

The scale of the pair’s ambitions was summarised by Ocado boss Tim Steiner, who said it could transform the food retail industry in the US.

He added: “[It] represents a huge opportunity to redefine the grocery experience of Kroger's customers and create value for the stakeholders of both Kroger and Ocado."

The plan is to roll out three customer fulfilment centres (giant automated warehouses) this year and a total of 20 over three years.

READ & WATCH: How the automated warehouse of the future picks and packs your groceries in just five minutes 

Kroger demonstrated its commitment to the Anglo-American alliance by subscribing for 33.1mln Ocado shares worth £183mln, which would give it a 5% share of the UK business.

It has even said it will pay compensation if it fails to hit the capacity targets the two retailers have agreed.

“This is clearly a transformative deal for Ocado, and one that is on a completely different scale to those announced in the past,” said Numis analyst Andrew Wade.

“We have little doubt that an attractive return on invested capital will be achieved on the huge amount of capital set to be invested across Ocado’s global Ocado Smart Platform partnerships and, with a significant long-term earnings runway now in place, retain our positive stance.”

Fourth international partnership 

Kroger is the fourth international partnership for Ocado and its fifth in total as it has looked to expand, not as an online grocer but more as a technology solution provider.

Earlier this month, the company inked an agreement with Sweden's ICA, building on overseas deals with France's Group Casino and Sobeys of Canada. 

Remember too, Ocado counts Morrison Supermarkets PLC (LON:MRW) as one of its customers, having run the technology and delivery network for the Bradford-headquartered supermarket chain's online operation since it launched in 2014. 

The shares, which have more than tripled in value over the last year, were changing hands for 925p each, up 68% on the day. 

This values the business at just over £6bn, which, if the stock remains at these heady levels, would catapult Ocado into the FTSE 100.

£100mln boost for the boss

For CEO Steiner, Thursday has been very profitable with his stake in the business he founded worth £250mln, making him £100mln richer.

There are losers in the rapid ascent of the share price – the short sellers betting that Ocado would stumble and fall with the onslaught of the big beasts of online retail, led by Amazon.

Instead, it has taken the fight to the opposition with more than a little success.

Losses incurred today alone by the ‘shorties’ are in excess of £150mln.

Get shortie

One suspects the momentum will continue to work against the men and women in dark glasses as the hedge funds and proprietary trading desks look to cover their positions.

And there’s a premium that accrues when a company is elevated to the FTSE 100 and the tracker funds are required to stock up shares on newly promoted firms.

All in, Numis got it spot on: this is a big deal … for everyone involved.

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