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Ocado ups investment after winning deal with Japan's largest retailer

Aeon's first depot is planned to go live in 2023 with the aim of having £1.4bn of sales capacity after two years

Ocado Group PLC -

Ocado Group PLC (LON:OCDO) has won a contract to help Japan’s largest grocer build a new online delivery business, though it used the good news to slip in the fact that investment costs will increase by £25mln next year.  

Aeon, a Chiba-headquartered conglomerate that runs 21,000 stores across various businesses and 14 countries, will pay the FTSE 100-listed group upfront fees during the development phase, with fees then linked to subsequent sales once the first depot goes live in 2023.

READ: Ocado believes small is beautiful for Bristol delivery depot

Ocado also said it is upping investment in its Solutions business “to scale the resources and infrastructure required to serve our current and future partners successfully”, with the extra £25mln covering extra support costs generally and some specific early costs of implementation for Aeon.

Aeon’s first robot-operated warehouses, or ‘customer fulfilment centres’ (CFC) as Ocado likes to call them, will be built in the Kantō region, the area that includes Tokyo.

Under the agreement, extra capacity will be added over the following two years and Japanese retailer aims to be making at least ¥200bn (£1.4bn) in sales in this region by 2025 and then develop a national network over subsequent years.

The first facilities will be a mix of large and small CFCs, indicating Ocado is making use of its new flexibility as the announcement comes just a day after Ocado said it was adding a new, smaller ‘mini-CFC’ to its range of depot sizes, starting with the construction of one in Bristol.

This will enable Aeon to serve “a wide range of customer shopping missions flexibly as the Japanese grocery ecommerce market continues to develop”, the companies said in Friday's statement.

Aeon chief executive Motoya Okada noted that Ocado was a “state-of-the-art, exciting and transformative partner aligned with our strategy of accelerating Aeon's Digital Shift to serve Japan's consumers”.

Counterpart Tim Steiner said that Aeon was “another extraordinary retailer” to have signed up for its services, following Ocado’s wins with Kroger in the US, Sobeys in Canada, France's Casino and Swedish grocer ICA.

Shares in Ocado shot up 13% to 1,359p on Friday morning, helping to pretty much wipe out the recent losses sparked about by a report from broker Jefferies that suggested the group's relationship was “cooling” with Kroger.

Broker Peel Hunt noted that Aeon is also looking to leverage Ocado’s end-to-end software platform and other engineering support services and that the agreement is mutually exclusive in Japan, conditional on Aeon meeting market share or CFC capacity targets.

"This is a major win for Ocado on several fronts: not only does this offer it a great source of revenue, but it also proves Ocado’s ability to be a truly international player."

Sophie Lund-Yates, analyst at Hargreaves Lansdown, said the Aeon deal was "welcome news" for Ocado but "no one should be popping champagne just yet though".

"This is an exciting announcement, but the proof will be in the pudding. With a sales-based valuation more than double its long-term average, and no real profits expected any time soon, Ocado will have to wait for years to see if the current partnerships pay off. 

"The warehouse fire earlier this year mean operational performance is still under the microscope. But if Ocado can keep its house in order this time, it may catch the eye of further partners, and that’s where future fortunes lie."

Quick facts: Ocado Group PLC

Price: 1288.3017 GBX

AIM:OCDO
Market: AIM
Market Cap: £91 m
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