Grocery Delivery Wars: Kroger Is Fending Off Amazon’s Whole Foods With a New Service of Its Own

SunMag

Companies / SunMag 26 Views 0

When Amazon amzn bought Whole Foods almost a year ago, Ocado Group was one of the few retailers to see its shares go up.

That’s because there were hopes the internet behemoth could swallow up the British online grocer, too.

But the deal actually had another impact on Ocado ocdgf . It made supermarkets around the world quake at the thought of Amazon’s online grocery rampage. They turned to Ocado to help them fend off the threat.

After a series of smaller tie-ups, the company has announced the big one: a partnership with Kroger kr , the second biggest U.S. grocer after Walmart wmt . This has been a long time coming - it's been chasing a deal with a major American supermarket for much of the last five years.

This partnership, which will see Kroger license Ocado's technology to expand its own home-delivery business, could include construction of up to 20 distribution centers over the first five years. This puts it on a completely different scale to Ocado’s other contracts, with France’s Casino Guichard-Perrachon and Canada’s Sobeys.

There is no doubt this is good news for Ocado. But the worry with the spate of agreements that the company has announced over the past six months is that it must keep investing. Each has peak cash flow requirement of about 30 million pounds ($40.6 million). That just reinforces the fear with the Ocado investment case: that it’s all jam tomorrow.

Ocado seems to have caught on to this concern: Kroger will take a 5% stake in the company, injecting 183 million pounds. Added to the about 140 million pounds from a share sale in February, and the company will have more than 300 million pounds of firepower.

The two companies will also explore ways of using Kroger’s balance sheet -- the U.S.'s second-biggest grocer (behind Walmart) had total assets of $37 billion as of February 2018 — to fund some of Ocado’s investment.

That could include more payments from Kroger upfront, and lower fees over time than customers pay for other deals, although Ocado says the overall economics won’t substantially differ from the other arrangements.

Shares in Ocado rose as much as 50.7% on Thursday, to a record 831.8 pence, the most since its 2010 initial listing.

That reflects the undoubted potential of the Kroger deal. But it shortens the odds of Ocado and its investors finally finding an exit through a sale to a bigger retailer. After all, Ocado's had a stellar run over the past six months. But the preceding seven years have really tried investors' patience.

Kroger will have an overall 6% stake in the company — it already had a 1% stake before this deal was announced, so that makes it a natural candidate for increasing its holding or acquiring the company.

Meanwhile, the business of dropping groceries as U.K. customers' doors jars with Ocado's push to become a whizzy technology company. Its existing contract to be supplied with products by Waitrose expires in 2020. That could be a natural point to review this operation, particularly if Waitrose were to be sold by the John Lewis Partnership.

With the surge on Thursday, Ocado shares have tripled since it announced the agreement with Casino in November. The company’s enterprise value has jumped to three times forward sales, nearly closing its discount to Amazon.

To justify such a lofty valuation it needs the raft of contracts it has secured over the past six months to live up to their huge potential. There’s certainly execution risk here.

But it also needs a bid from a buyer to land on its doorstep. With a muscular investor like Kroger, that could finally happen.

Comments