LONDON (Reuters) – The US supermarket chain Kroger Co is expected to order the first three out of 20 high-tech warehouses of online food retailer Ocado by the end of the year, as part of a groundbreaking deal agreed in May.
A logo of Kroger will be displayed shortly after the opening bell in New York, USA, on December 5, 2017 on a monitor above the floor of the New York Stock Exchange. REUTERS / Lucas Jackson
Through the deal with its largest partner, Ocado will strengthen its delivery business by building robotic warehouses for Kroger in the United States and increasing stakes in the fight against Amazon.com Inc.
The Kröger deal is Ocado's largest yet, outstripping all of the warehouses the company has built or plans to build with Morrisons in the UK, Casino in France, Sobeys in Canada, and ICA Group in Sweden.
Ocado said that the detailed agreement sets the key parameters for cooperation with Kroger.
It includes how Kroger orders warehouses, or what Ocado calls Customer Fulfillment Centers (CFCs) and how Ocado will develop and operate those Web sites in the United States. Kroger expects to order 20 CFCs in the first three years of the agreement.
The Ocado share rose on Tuesday by up to 6 percent, with profits increased last year to 195 percent.
The British company has not announced the location of the first three sites, but details will be published by Kroger in a few weeks.
The goal is for Kroger's CFCs to go live within about two years of each order.
Ocado said the conditions and fee structure of Kroger's business are similar to those for its other transactions, which so far summarize up-front charges and current capacity fees. It did not reveal numbers.
Bernstein analyst Bruno Monteyne said he expects Ocado to spend 30 million pounds ($ 38.3 million) per CFC, with Kroger paying a 3.5 percent capacity fee.
Ocado estimates that the cumulative net capital outflow of the first three CFCs will total £ 90m, well within the £ 500m funding margin.
As with previous deals, Ocado has agreed to install and maintain Mechanical Handling Equipment (MHE) modules that are sufficient to ensure an agreed level of workmanship.
The first CFCs ordered in 2018 will have similar financing requirements to previous deals. However, Ocado and Kroger are still debating how future CFCs will be funded.
Analysts said Kroger could spend a larger portion of the investment effort to retain more of the future profits from the food trade.
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Reporting by James Davey; Editing by Keith Weir