LONDON (Reuters) – Britain’s online supermarket Ocado (OCDO.L) clinched a game-changing deal with Kroger (KR.N) as its exclusive partner in the U.S., securing its entry into the world’s biggest market and sending its shares soaring more than 50 percent on Thursday.
The agreement, Kroger’s response to the competitive threat posed by Amazon’s (AMZN.O) purchase of Whole Foods, takes Ocado’s home-delivery technology into the U.S. for the first time and marks the fourth major deal it has signed with supermarkets around the world in six months.
Ocado’s Chief Financial Officer Duncan Tatton-Brown said the new partnership with the world’s third largest retailer was “transformational”.
“The scale of the proposed transaction, and therefore the quantum of its economics, is wholly different to those we’ve already signed,” he told reporters on Thursday.
Retailers around the world are experimenting with different ways of delivering online grocery orders, seeking to balance speed with cost as e-commerce takes off for food.
Ocado’s unique software and hardware automates the processing and packing of online groceries, using hundreds of robots rather than people to pull together orders quickly in fulfilment centers.
The UK firm says its Ocado Smart Platform (OSP) technology is the most advanced in the world while skeptics have criticized its high-tech approach as too costly and complicated.
U.S. players such as Walmart (WMT.N) are focusing on cheaper low tech warehouses that are closer to customers.
Ocado’s Tatton-Brown said he thought Kroger, which had sales of $122 billion in its last fiscal year, was the best-positioned grocer to succeed in the U.S. and it will end discussions with other U.S.-based retailers.
“The opportunity for a business like Kroger is huge, and I think we have the best potential partner in the U.S.,” he said.
“They are ambitious, they are capable and together we hope they can transform their industry.”
Shares in Ocado, which listed in 2010, rose more than 80 percent, to a record high of 1,000 pence.
They pared some of the gains to trade up 52 percent at 834 pence at 1249 GMT, valuing the group that delivered its first annual profit in 2014 at 5.5 billion pounds.
Kroger, which already held a 1 percent stake in Ocado, will buy new shares equivalent to 5 percent valued at 183 million pounds ($247.5 million), Ocado said.
“We think this is just about as positive a deal as could have been expected to have been announced by Ocado,” analysts at Barclays said.
“The company now has an extremely credible partner in the largest grocery market in the world.”
Founded in 2000 by three former Goldman Sach’s bankers, Ocado has licensed OSP to grocers operating in markets including ICA in Sweden, Sobeys in Canada and Casino in France.
Co-founder and chief executive Tim Steiner saw the value of his stake in the firm rise more than 100 million pounds on Thursday to about 240 million pounds, according to Thomson Reuters data.
Kroger will identify at least 20 sites to build new, automated warehouse facilities in the United States, Tatton-Brown said, exceeding all of the centers Ocado has built or is planning to build for all its other partnerships.
The two companies are working to identify the first three sites in 2018.
Tatton-Brown said the potential for the partnership goes far beyond the initial 20 centers, with scope for two or three times that number in the future.
Cincinnati, Ohio-based Kroger, which has stores in 34 mainly midwest and southern states, was already expanding its online capability in step with rivals like Walmart.
Kroger said in March it delivered from more than 872 stores, offering 1,091 kerbside pickup locations, and would offer 500 new locations in 2018, as well as expanding a partnership with San Francisco-based Instacart to 45 metropolitan markets.
Bricks-and-mortar retailers in the United States and elsewhere are under intense pressure from online rivals. Fresh food and groceries became a major battle ground when e-commerce giant Amazon bought Whole Foods for $13.7 billion last year.
Tatton-Brown said online grocery shopping in the U.S. was still very low at between 1 and 2 percent of total grocery spending and analysts think it could rise to 20-25 percent over the next decade.
HEDGE FUNDS BURNT
The detailed financial terms have yet to be agreed, but Kroger could bring forward some of its payments under the deal, which would reduce Ocado’s need for capital. If the retailer fails to hit volume targets it could also lose exclusivity and will have to pay compensation to Ocado.
Before Thursday’s deal, Ocado’s stock was trading on a heady multiple of 2,250 times its current earnings. The average multiple for the UK grocery retail sector is 17.
The surprise deal and subsequent jump in the share price caught out many hedge funds betting the next move would be down.
Shorting of the stock, where shares are borrowed and sold in the hope of buying them back later at a cheaper price to make a profit, was at a five-month high prior to the announcement. More than 56 million Ocado shares were out on loan on Tuesday, the most recent data from industry tracker FIS’ Astec Analytics showed.
Exposed hedge funds included GMT Capital, Hunt Lane Capital and London-based Marshall Wace.
Additional reporting by Maiya Keidan; editing by Kate Holton and Elaine Hardcastle
JEFFREY LIPTON in BARBADOS – http://feeds.reuters.com/~r/reuters/businessNews/~3/pfjHl9WK7Yg/ocado-shares-soar-on-major-deal-with-kroger-to-enter-the-u-s-idUSKCN1II0L0