AMZN Amazon.com Inc

By Heather Haddon and Saabira Chaudhuri 

Kroger Co. is investing in a British online grocer as the U.S.'s largest supermarket chain seeks to compete with Amazon.com Inc.'s expanding food-retail operation and Walmart Inc.'s digital deals.

Kroger has agreed to raise its stake in Ocado Group PLC, bringing its total investment in the U.K. company to more than 6%, and license technology to run automated warehouses and make online deliveries to customers. The companies will find three locations for new warehouses this year and said they would find locations for a total of 20 warehouses in three years.

Ocado's technology has become increasingly attractive as retailers globally scramble to bulk up their online offerings after Amazon's $13.7 billion deal to buy Whole Foods last year. That deal served as a catalyst for U.S. grocers large and small to increase their online capacity before losing more customers. Kroger executives have said that they were meeting with companies across the globe to search for deals.

Kroger so far has focused most of its online-grocery efforts on opening hundreds of store pickup sites, letting customers order groceries online and then collect them curbside at stores. It has joined with third-party providers, including Instacart Inc. and Uber Technologies Inc., to test online-grocery delivery. Its latest investment in Ocado is worth GBP183 million ($247.2 million), the U.K. firm said.

The company has also invested millions of dollars in data science to predict customer-ordering patterns.

"Kroger has more data than any of our competitors," Chief Executive Rodney McMullen wrote in a shareholder letter released earlier this week.

Meanwhile, Walmart, the U.S.'s largest food seller, has expanded its online delivery partnerships faster, and it reached a deal last week to take a majority stake in Indian e-commerce company Flipkart. Amazon is expanding its Whole Foods delivery sites this year and announced earlier this week that it will give Prime members further 10% discounts at the natural-foods chain.

Kroger shares, down 9% this year, rose 2.9% in premarket trading. Amazon's deeper play in grocery business, and weak inflation in food for home, has weighed on supermarket stocks over the past year.

Ocado's shares rose 50% in London trading, as investors cheered the overseas deal, its fourth this year.

The brainchild of three former Goldman Sachs bankers, Ocado -- which calls itself one of the world's largest online-only grocery retailers -- has a two-pronged model. It sells groceries directly, much like many of its online rivals, but also licenses its technology and equipment to other grocers in Britain and internationally.

Some grocers have workers collect items for online orders within retail stores, instead of from dedicated warehouses. But Ocado Chief Executive Tim Steiner has previously described this method, called store picking, as "a really stupid business," saying picking from stores pressures already low margins by piling on additional costs while cannibalizing sales.

Ocado's store-free model focuses on keeping a lid on costs through scale, automation and sophisticated algorithms, and has barriers to entry that are high enough that Mr. Steiner says it can't be replicated.

In fiscal 2017 it generated GBP1.43 billion ($1.93 billion) in revenue, with active customers up over 11% to 645,000 and order volumes up 14% to 263,000 a week.

At its warehouses, Ocado sends crates of grocery products and boxes for customers labeled with bar codes to enable sorting by the company's software. The crates whiz around on conveyor belts to picking stations for filling and distribution. From its three warehouses, Ocado trucks out its own products as well as those of upmarket U.K. grocer Waitrose, to whom it pays a fee to be able to offer its products to 70% of British households.

The Kroger deal is the latest in a flurry of long-awaited international deals that Ocado had for years promised to investors but failed to deliver on until recently. Earlier this month it said it had struck a deal to build Swedish supermarket ICA's online grocery business. It also has deals in place with French supermarket chain Groupe Casino and Canadian grocer Sobeys.

Thursday, Jefferies analyst James Grzinic described Kroger's investment in Ocado and its commitment to finding locations for U.S. warehouses as "the strongest endorsement that Ocado could have delivered to investors."

While Ocado will now be focused on delivering on its U.S. deal, "this will not preclude it from continuing to discuss other possible international partnerships," Mr. Grzinic said.

Founded in 2000, Ocado now has 12,600 employees and a market share in the U.K. of about 1.2% according to Kantar. Data from UBS released last month showed that Ocado has the most loyal shoppers in the U.K., with the highest retention of any grocer.

Write to Heather Haddon at heather.haddon@wsj.com and Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

May 17, 2018 10:03 ET (14:03 GMT)

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