September 18, 2018 / 6:31 AM / 2 months ago

Ocado says partner Kroger making progress on picking U.S. sites

LONDON (Reuters) - British online grocer Ocado (OCDO.L) said on Tuesday that Kroger (KR.N), its most important partner, had made good progress identifying locations for the first of at least 20 sites to build automated warehouses in the United States.

FILE PHOTO: Delivery vans are lined up prior to dispatch at the Ocado CFC (Customer Fulfilment Centre) in Andover, Britain May 1, 2018. REUTERS/Peter Nicholls

In May, the U.S. supermarket group struck a deal with Ocado to ratchet up its delivery business with the construction of robotically operated warehouses, upping the ante in its battle with Amazon (AMZN.O).

The Kroger deal is Ocado’s biggest yet, exceeding all of the centers the firm has built or plans to build with Morrisons (MRW.L) in Britain, Casino (CASP.PA) in France, Sobeys (EMPa.TO) in Canada and ICA Group (ICAA.ST) in Sweden.

Kroger is working to identify the first three sites for warehouses, which typically take two years to open.

“They’re making good progress identifying which particular sites and which particular cities. And we’re making good progress working on the details of the commercial relationship,” Duncan Tatton-Brown, Ocado’s chief financial officer told reporters, without naming the locations.

“There’s a lot of work going on because even though the final deal (service agreement) isn’t agreed we are actually being paid. So nothing is holding us up,” he said.

Online grocery shopping is growing rapidly, but companies are still grappling with the challenge of how to make money from taking goods at different temperatures to customers’ doors.

Ocado’s experience of developing a high-tech distribution system has helped its progress toward sustainable profit growth, with its shares up more than 200 percent over the last year thanks to four major overseas technology partnership deals.

The stock rose as much as 4.8 percent on Tuesday after Ocado reported third-quarter retail revenue growth in line with full-year guidance and said it had ramped up capacity in Britain with the opening of its fourth robotic warehouse this summer at Erith, near London.

Delivery vans are lined up prior to dispatch at the Ocado CFC (Customer Fulfilment Centre) in Andover, Britain May 1, 2018. Picture taken May 1, 2018. REUTERS/Peter Nicholls

The stock was up 39.2 pence at 951.8 pence at 0925 GMT, valuing the business at 6.4 billion pounds ($8.4 billion).

“We think there is a great deal for management to now execute on and thus see a low likelihood of another major deal in the near term,” said RBC Europe analyst Sherri Malek.

Ocado said Erith processed over 20,000 orders last week, 14 weeks after opening, a number its third warehouse in Andover, southern England, took 15 months to achieve.

BIGGEST CHALLENGE

Retail revenue rose 11.5 percent to 348.6 million pounds in the 13 weeks to Sept. 2, having climbed 11.7 percent in the first half. In July Ocado forecast retail revenue growth of 10-15 percent for the full year.

“Most of our competitors would die for a sales growth where we are,” said the finance chief.

Industry data also published on Tuesday showed sales at Britain’s four biggest grocers rose in a range of 1.6 to 3.1 percent in the latest 12-week period.

Tatton-Brown said Ocado’s biggest challenge currently was hiring enough people to keep up with the business’ growth.

“We’re hiring but we’d probably like to hire a bit faster,” he said.

Prior to Tuesday’s update, analysts’ average forecast was for Ocado to make a 2018 pretax loss of 30 million pounds and core earnings (EBITDA) of 73 million pounds. That compares with a loss of 500,000 pounds and core earnings of 84.3 million pounds in 2017.

($1 = 0.7611 pounds)

Editing by Kirsten Donovan and Mark Potter

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