Ocado Surges on Landing French Client for Smart Technology
French Retailer Casino to Use Ocado's E-Commerce Technology
(Bloomberg) -- Ocado Group Plc surged after securing a landmark technology licensing deal with its first major client outside the U.K., French supermarket operator Casino Guichard-Perrachon SA.
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 northern France.
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 percent in early London trading, the most since May 2013, having gained 7.3 percent Monday.
The deal is a rare positive in a U.K. retail market that has soured due to Brexit-driven inflation and wavering consumer confidence. Partnering with a grocer that generated 78.8 billion euros ($93.8 billion) of revenue last year gives credibility to founder Tim Steiner’s vision of Ocado as a technology licensing company. Amazon.com Inc.’s acquisition of Whole Foods Market Inc. 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 percent 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.
French Tumult
The deal comes with France’s grocery market in tumult. Closely held E. Leclerc surpassed Carrefour SA 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 percent 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 U.S. Casino is betting on Parisians opting to have their groceries delivered to their door and opted to partner with Ocado because it believes the grocery specialist has the best model.
Philippe Suchet, an analyst at Natixis, said Ocado had previously failed to find a partner in France because its offering was deemed too expensive. But last year’s Brexit-induced currency shock has tipped the balance.
“With the low pound, we have today a deal that is better than it would have been three or four years ago,” Regis Schultz, CEO of Monoprix, said on a call with reporters.
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 pounds ($467 million) in sales a year and the facility could service Casino’s other retail chains in future, Schultz said.
Casino will gain exclusivity over the use of Ocado’s smart platform in France if it opens more fulfillment centers within a timeframe agreed to by the two companies.
Terms of the deal:
- Casino will pay some fees up front and others when the warehouse becomes operational
- Ocado will incur additional capital expenditure of 15 million pounds in its next financial year, offsetting fees it will receive
- Ocado expects profitability in its licensing division to increase from 2019
- Future payments will be based on the capacity of Casino’s fulfillment centers, rather than sales
The deal may add 6 million to 10 million pounds 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 pounds.
Tatton-Brown said Ocado remains in talks with other international grocery retailers but cautioned that the discussions were complex.
“We believe more deals are on the way,” said Richard Bernstein of activist shareholder Crystal Amber, which started building a stake in the online retailer in May.
--With assistance from David Hellier Robert Williams and Albertina Torsoli
To contact the reporters on this story: Sam Chambers in London at schambers7@bloomberg.net, Thomas Mulier in Geneva at tmulier@bloomberg.net.
To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John J. Edwards III
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