LONDON — US grocery giant Kroger has signed an exclusive deal with Ocado, the British online grocer that makes tech savvy supply chain and fulfilment technology.
Ocado said in a statement on Thursday that it has signed a deal allowing Kroger to use its technology exclusively in the US. Kroger will pay undisclosed monthly exclusivity and consultancy fees, which will offset the total cost of the deal that has yet to be agreed. Kroger is buying a 5% stake in Ocado for £183 million under the terms of the deal.
UK-headquartered Ocado was founded by former Goldman Sachs employees in 2000 as an online-only supermarket, but has in recent years sought to position itself as a technology provider to other supermarkets. The company’s proprietary warehouse technology uses robotics and automation to drive high levels of efficiency when packing and shipping orders.
Kroger will use Ocado’s “Smart Platform” technology to develop three new automated warehouses across the United States this year that will use robots to fulfil orders. The pair is targeting 20 new warehouses across the US over the next 3 years.
Ocado CEO Tim Steiner said in a statement: “The opportunity to partner with Kroger to transform the way in which US customers buy groceries represents a huge opportunity to redefine the grocery experience of Kroger’s customers and create value for the stakeholders of both Kroger and Ocado.
“As we work through the terms of the services agreement with Kroger in the coming months, we will be preparing the business for a transformative relationship which will reshape the food retailing industry in the US in the years to come.”
Ocado shares, which are listed on the FTSE 250 index in London, jumped by almost 50% on news of the deal. The rally is likely helped by a squeeze on short sellers who have bet against the company and are now having to cover their losses by buying back shares. Around 7% of Ocado’s stock is on loan to short sellers, according to ShortTracker.co.uk.
Kroger CEO and chairman Rodney McMullen said: “Our partnership with Ocado will speed up our efforts to redefine the food and grocery customer experience – creating value for customers and shareholders alike.”
Kroger is the second largest grocery business in the US, with 2,800 stores and sales of $122 billion last year. Competition from Amazon and discounters such as Lidl saw its share price fall by over 40% last year to a four-year low and Kroger announced a $9 billion strategy called “Restock Kroger” last year aimed at modernising the company with technology.
Brittain Ladd, a former Amazon executive and supply chain expert, was hired by Kroger last year to evaluate the grocer’s digital and supply chain strategies.
Ladd told Business Insider this week: “In the United States, the vast majority of grocery retailers all leverage traditional distribution centres and fulfilment centres for grocery and Kroger grew by acquisition. Kroger has 42 distribution centres but they’re older, they don’t have an optimised supply chain.
“So my recommendation to them was to meet with Ocado, meet with TakeOff Technologies and then conduct a network optimisation study in the United States to determine what’s the best way to leverage either Ocado’s technology, TakeOff Technologies systems or both.”
TakeOff Technologies is another online grocery business based in the US.
Ladd said implementing Ocado’s technology would be “a way to greatly reduce their supply chain costs” and would “allow Kroger to probably close nearly half of their older distribution centres.”
“They are just years ahead of everybody else,” Ladd said of Ocado. “I don’t think people realise how advanced Ocado is when compared to distribution methods used in the United States.”
Ladd said he also advised Kroger to evaluate acquiring Ocado for around $2 billion, although Thursday’s deal suggests Kroger is not pursuing this advice.
The Kroger deal is the latest in a string of international tie-ups for Ocado in recent months. Ocado announced a partnership with Swedish retailer ICA at the start of the month and a deal with Canada’s Soebys in January.
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