British online supermarket pioneer Ocado has signed a partnership with Swedish market leader ICA Group, its third major deal in six months as food retailers race to meet the challenge of online competition.
The deal comes with the spotlight on the grocery sector after Britain’s Sainsbury’s agreed a 7.3 billion pound ($10 billion) bid on Monday to buy Walmart’s Asda, a bold move that would overtake long-time UK market leader Tesco.
That deal was in part a response to the growth of online retail, particularly the relentless march of Amazon.
Ocado has long argued its cutting-edge technology - where pallets are automatically moved around giant warehouses on conveyor belts or grids with hundreds of robots to help workers rapidly fill online grocery orders - could help other companies meet the challenge.
However, some analysts say the company needs to strike many more deals for its so-called Ocado Smart Platform (OSP) to justify its high-flying stock market valuation.
“Ocado’s share price implies 15 OSP deals and 17 software deals. Therefore adding one more deal should not come as a surprise,” said Bernstein analyst Bruno Monteyne, who has an underperform rating on the stock.
Ocado shares rose as much as 7 percent on Wednesday, taking gains over the last year to 120 percent, after the firm forecast the ICA deal would create “significant long term value.”
Ocado signed a deal with Canada’s Sobeys in January and one with France’s Casino in November. Last June it also signed a smaller software deal with an unidentified European retailer.
ICA has around 1,300 stores in Sweden and a market share of around 36 percent, generating sales of about 106.5 billion Swedish crowns ($12 billion).
The deal will see Ocado develop ICA’s website and mobile phone ordering applications, construct an automated warehouse, or Customer Fulfillment Centre (CFC) as Ocado calls them, and develop delivery technology.
Ocado said the platform would be up and running by 2020.
The first CFC will be built in the Greater Stockholm area. Development of others elsewhere in Sweden will be considered.
“We have a competitive platform as it is today, but we know we need to do much more to stay competitive. This will help us strengthen our market leadership both online and offline,” ICA Chief Executive Per Stromberg told a telephone conference.
The deal will see ICA pay Ocado undisclosed upfront fees upon signing and during the development phase, then ongoing fees linked to both sales, installed capacity within the CFC and service criteria.
Ocado said the deal would be earnings neutral in 2018. It expected minimal additional capital expenditure (capex) in 2018, but additional capex in future years as development of the CFC project starts.
Ocado, founded by three former Goldman Sachs bankers in 2000, has polarized opinion like few other stocks. Some view it as the future of grocery shopping; others as a costly and complicated venture that will never make sustained profits.
Shares in Ocado have had a rollercoaster ride since listing at 180 pence in 2010. They were up 23.6 pence at 578.3 pence at 0804 GMT, valuing the business at 3.9 billion pounds.