Ocado Group surged after securing a landmark technology licensing deal with its first major client outside the UK, French supermarket operator Casino.
Casino will use Ocado’s online grocery-delivery system - which encompasses everything from robots picking orders to software that routes them to shoppers’ homes - on its Monoprix.fr website, the companies said in a statement Tuesday. They will spend at least two years building a warehouse to process orders for customers in Paris, Normandy and the Hauts de France region.
The Hatfield, England-based company had spent at least four years hunting for a large international partner, although it struck a licensing agreement in June with a small European grocer that it has yet to name. The company’s shares rose as much as 28% in early London trading, the most since May 2013, having gained 7.3% Monday.
The deal is a rare positive in a UK retail market that has soured due to Brexit-driven inflation, wavering consumer confidence and encroachment by Amazon.
Partnering with a grocer that generated €78.8 billion of revenue last year gives credibility to founder Tim Steiner’s vision of Ocado as a technology licensing company.
Amazon’s acquisition of Whole Foods Market has accelerated the pace of change in the industry and has bolstered interest in Ocado’s technology, according to Steiner.
“This is the great news Ocado investors have been waiting for,” Bryan Roberts, an analyst at TCC Global, said by phone. “The deal makes a huge amount of sense given Monoprix’s stature and premium offer in Paris, where there’s a clear appetite for home delivery.”
Skeptical investors are licking their wounds: Short interest stands at 17% of Ocado’s outstanding shares, about seven times the average of FTSE 250 companies, according to Markit. That makes the shares susceptible to so-called short squeezes in which investors who have bet the stock may fall rush in to buy the shares and limit any losses.
Quelle Surprise?
The deal comes with France’s grocery market in tumult. E. Leclerc surpassed Carrefour as the country’s largest supermarket operator this year, and new Carrefour Chief Executive Officer Alexandre Bompard recently delayed the unveiling of the company’s turnaround strategy until next year.
Online sales comprise about 6% of the French market, according to Ocado Chief Financial Officer Duncan Tatton-Brown.
The majority of that is from click-and-collect services known as “Drive,” which have flourished for more than a decade, making the industry more advanced in that respect than the US.
“This deal is quite a surprise as it seems that Ocado came previously in France and could not find any partner as the French operators thought Ocado’s solution was too expensive,” wrote Philippe Suchet, an analyst at Natixis.
Casino will license Ocado’s so-called smart platform, which encompasses storing, picking and transporting groceries. The first fulfillment warehouse will be larger than Ocado’s site in Andover, England, which can handle £350 million in sales a year.
Casino will gain exclusivity over the use of Ocado’s smart platform in France if it opens more fulfilment centres within a timeframe agreed to by the two companies.
The French retailer will pay some upfront fees and others when the warehouse becomes operational. Future payments will be based on the capacity of Casino’s fulfilment centres, rather than sales. Ocado expects to incur additional capital expenditure of £15 million in its next financial year.
The deal may add £6 million to £10 million of pretax profit once it’s fully operational in 2021, Bruno Monteyne, an analyst at Sanford C. Bernstein, said in a note. Last year Ocado made pretax profit of £15.2 million.
News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.
