Ocado Group PLC (LON:OCD) shares jumped 6% as it signed a deal to develop the online grocery business of Coles Group, one of Australia’s largest supermarket chains.
The FTSE 100 firm will supply Coles with its Ocado Smart Platform software and will build two robotic warehouses, including one in Sydney and another in Melbourne.
READ: M&S set for big rights issue, divi cut to fund online grocery joint venture with Ocado
The warehouses, or customer fulfilment centres (CFCs) as Ocado likes to call them, will go live within four years.
Coles, which has 818 supermarkets, 911 liquor stores and 712 Coles Express petrol stations in Australia, generated sales of A$39.4bn in 2018.
Coles already has an online grocery delivery service, which makes more than A$1bn of annual sales.
However, the supermarket group wants to serve customers in Australia’s larger urban areas through Ocado’s CFCs with people in less populated areas to benefit from the UK company’s store-pick software.
Coles will pay Ocado upfront fees upon signing and during the development phase, then ongoing fees linked to both sales achieved and installed capacity within the CFC and service criteria.
The agreement is exclusive in Australia as long as certain conditions continue to be maintained.
Deal to create “significant long term value” for Ocado
Ocado said it expects the deal to create “significant long term value” to the business. The partnership will be earnings negative in the current financial year as no cash fees are recognised in revenues until operations start.
Ocado expects “minimal” additional capital expenditure this year with most of the spending to be incurred in the 18 months before the CFCs are opened.
"Coles is a grocer with a global reputation for innovation and outstanding commitment to their customers, and I am delighted we will be working together in the years to come to reshape the food retail landscape in Australia," said Ocado chief executive Tim Steiner.
Ocado lands five international deals and one with M&S in less than 18 months
The partnership agreement comes a month after Ocado unveiled a £1.5mln retail joint venture with UK retailer Marks and Spencer PLC (LON:MKS) and marks the online grocer’s fifth major international deal in less than 18 months.
It has signed deals with US group Kroger Co, Casino in France, Sobeys in Canada, and ICA Group in Sweden.
Ocado has its own online grocery delivery business but its stock market valuation £8.7bn has been led by deals to provide international retailers with the infrastructure and software to develop their online grocery businesses.
Food retailers around the world have been adjusting to the growing shift online as they face competition from the likes of Amazon.
In morning trading, shares were changing hands at 1,333p each.
Russ Mould, investment director at AJ Bell, said: “There is still very little clarity on what kind of returns the company will eventually derive from these tie-ups, which are likely to involve significant start-up costs, and how many more it can secure, but some investors are sufficiently excited about the potential to put to one side the fact the company is currently loss-making.
“Since Ocado signed up the first international client to its platform in June 2017 its shares have soared more than four-fold and taken a place in the FTSE 100.”
Coles deal provides reassurance after fire at Andover, says Peel Hunt
Peel Hunt upgraded its stance on Ocado shares to 'buy' from 'hold' and raised its target price to 1,700p from 1,000p.
The broker said the Coles deal further solidifies its long-term thesis around the sock and providing further reassurance after a fire destroyed its warehouse in Andover, Hampshire.
READ: Ocado shares rise as Andover warehouse fire has smaller-than-expected impact on revenue
The Andover warehouse accounts for about 10% of Ocado’s capacity and more than 30,000 orders a week are processed by robots.
Earlier this month Ocado said in a trading update that the blaze at Andover carved about 1.2% off sales in the quarter ended March 3.
"We reinstate our buy thesis, with Ocado stating there is 'no significant implications' of the fire for its long-term strategy at its trading update, the M&S deal injecting £750mln cash and de-risking itself from the UK consumer, its Solutions clients Kroger and Sobey's continuing to be 'excited', real-time delivery with Zoom (Ocado's one-hour delivery service) pushing back the limited store pick offerings with Amazon, and Coles signing a deal after the fire," Peel Hunt said.