The Kroger Co’s plans to acquire rival Albertsons Companies Inc, one of the biggest deals in US grocery history, could spell good news for Ocado Group PLC (LSE:OCDO).
Kroger, the largest US grocery store, also happens to be Ocado’s biggest client, and its merger with Albertsons could provide it with the leverage to compete with the likes of Wal-Mart Inc and Amazon.com.
Ocado, which recently issued a profit warning on sales falling and increased cost pressures, jumped 6% to 465.9p on the back of the news from the US.
READ: Kroger confirms plans to acquire US grocery rival Albertsons in $24.6BN deal
But what does a merger in the US have to do with Ocado, and what could it exactly mean for the £3.8bn-valued company?
Ocado’s ties with Kroger date back to May 2018, when it signed an exclusive partnership to build 20 customer fulfilment centres (CFCs) across the US, using Ocado’s technology for its delivery services.
Since then, the UK robotics/retail company confirmed the location of the CFCs, opening six across the US, including Kroger’s hometown of Cincinnati, plus Dallas, and Atlanta.
Part of the CFC deal included the US company acquiring a 5% stake in Ocado for £183mln. The two, therefore, are intrinsically linked.
So, a merger between the two largest standalone US grocers is good news for everyone involved at Ocado.
Increasing US presence
Kroger is a big fan of Ocado following the input of Brittian Ladd, a consultant hired by Kroger in 2019 to assess its digital and supply chain strategies.
Ladd was so impressed with Ocado, he actually told Business Insider he urged the company to look into buying the UK firm in a US$2bn deal before the COVID-19 pandemic hit.
He had concluded that Ocado is “years ahead of everybody else,” and could “greatly reduce their (Kroger’s) supply chain costs,” enabling the grocer to “probably close nearly half of their older distributions.”
With that glowing recommendation in mind, and given the relationship between Kroger and Ocado, Albertson may be the next to benefit from the CFCs.
"The runway for additional Ocado technology sales into the US could expand significantly for Ocado," according to analysts at Jefferies.
That would be huge for Ocado.
Currently, Kroger has nearly 2,800 stores operating in 35 states. Adding in Albertsons' 2,300 stores would mean additional fulfilment centres, a much-needed boost for Ocado and something investors have seemingly priced in as occurring should the two US companies' deal complete.
Nothing is certain yet, but mergers like this are a potential way for Ocado to increase its presence without really doing a lot, and it may hope for more across some of its clients.