By Heather Haddon and Saabira Chaudhuri
Kroger Co. has struck a deal with a British grocer known for its
use of warehouse robots, as the biggest U.S. grocery chain aims to
supercharge its online delivery business in the face of competition
from Amazon.com Inc. and Walmart Inc.
Kroger has agreed to raise its stake in Ocado Group PLC to more
than 6%, and to license technology from the British company to run
automated warehouses and process online orders. The companies said
they will identify locations for three new warehouses this year and
a total of 20 warehouses in three years.
Kroger Chief Executive Rodney McMullen said that the companies
began discussing a partnership years ago and that it wasn't a
direct response to Amazon's $13.7 billion purchase of rival grocer
Whole Foods last year. The talks intensified in recent months after
Ocado improved its online grocery-delivery business, he said.
"They've done an incredible job over the years continuing to
improve the experience for the customers and the economics as
well," Mr. McMullen said in an interview Thursday.
The U.K. firm, which calls itself one of the world's largest
online-only grocery retailers, said Kroger's latest investment in
Ocado is worth GBP183 million ($247.2 million). The company took
its original stake of more than 1% earlier this year.
Kroger finance chief Michael Schlotman said the company will
expend further capital to build the warehouses, which Ocado will
operate. He said the added capacity should save the company in
other areas of operations, while also widening access to markets,
including some dense urban areas that Kroger has tended to
ignore.
Mr. Schlotman said at an investor conference Thursday that
Kroger generally seeks investments that will return at least 11% in
earnings after taxes, and the Ocado agreement "didn't have any
trouble clearing that hurdle."
Shares of Ocado, which in addition to selling groceries licenses
technology and equipment to other grocers, rose 50% to an all-time
high in London trading as investors cheered the overseas deal, its
fourth this year. Kroger shares, which have slipped this year, rose
1.3% on Thursday. Amazon's push into the grocery business, as well
as weak inflation in food for the home, has weighed on supermarket
stocks over the past year.
Even as Kroger has invested in technology instead of opening new
stores, investors have punished the grocer's stock, which dropped
12% in a single session when its latest quarterly report showed
gross margins had declined from a year earlier.
Walmart is focusing on food retail operations, too. The U.S.'s
largest retailer said on Thursday that sales rose in its latest
quarter thanks in part to its grocery business. Walmart hopes to
have its grocery-delivery service capable of reaching 40% of the
U.S. population by the end of this year.
Walmart has pursued online-delivery partnerships aggressively.
Most recently, it agreed to take a majority stake in Indian
e-commerce company Flipkart. Amazon is expanding its Whole Foods
delivery sites and said earlier this week that it will give Amazon
Prime members additional discounts at the natural-foods chain.
Ocado, meanwhile, has become a world leader in online grocery
sales, a tricky business that even Amazon has struggled to master.
The company says it has the world's most sophisticated automated
grocery warehouses. Thousands of robots at its facilities
communicate via advanced network technology to pick groceries out
of storage and fill as many as 65,000 orders a week. Artificial
intelligence helps to continually optimize those operations.
Ocado's technology has become increasingly attractive to those
looking to bulk up their online operations since Amazon bought
Whole Foods. Mr. Schlotman said Kroger's deal with the U.K. company
is exclusive across the U.S.
"This relationship with Ocado demonstrates that we do evolve our
thinking," the finance chief said.
Kroger so far has focused its online grocery efforts on opening
hundreds of sites at stores where customers can pick up groceries
ordered online. It has also worked with Instacart Inc. and Uber
Technologies Inc. to test online grocery delivery, and has invested
millions of dollars in data science to predict customer-ordering
patterns.
"Kroger has more data than any of our competitors," Mr. McMullen
wrote in a letter to shareholders earlier this week.
Analysts said Ocado could help Kroger process deliveries
efficiently and give it a jump on competitors. But the stake and
other investments for online expansion could further weigh on the
grocer's profit, they said.
J.P. Morgan analyst Ken Goldman called the deal "modestly
constructive" for Kroger, while cautioning clients that the U.S.
food retail industry is "littered with examples of European
companies failing to replicate their success here."
Mr. McMullen said that Ocado's experience would translate well
to the U.S. market, and that the deal won't prompt Kroger to lower
its earnings outlook.
Ocado, which was founded in 2000 by three former Goldman Sachs
bankers, has 12,600 employees and about 1.2% of the grocery market
in the U.K., according to Kantar.
Some grocers have workers collect items for online orders within
retail stores, instead of from dedicated warehouses. Ocado Chief
Executive Tim Steiner has described this method, called store
picking, as "a really stupid business," saying it piles additional
costs onto already low margins while cannibalizing sales.
Ocado's store-free model contains costs through scale,
automation and sophisticated algorithms. In fiscal 2017 the company
generated GBP1.43 billion in revenue, with active customers up more
than 11% to 645,000 and order volumes up 14% to 263,000 a week. The
company, however, reported a loss for the year and has warned that
heavy investments will drag down profits for its current fiscal
year.
At its older 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 its own products as well as those of
upmarket U.K. grocer Waitrose, to whom it pays a fee to offer its
products to 70% of British households.
The Kroger deal is the latest in a flurry of international deals
that Ocado had been promising to investors for years. Earlier this
month it said it had struck a deal to help Swedish supermarket ICA
build up an online grocery business. Ocado has also reached deals
with French supermarket chain Groupe Casino and Canadian grocer
Sobeys.
Jefferies analyst James Grzinic called Kroger's investment in
Ocado "the strongest endorsement that Ocado could have delivered to
investors."
Write to Heather Haddon at heather.haddon@wsj.com and Saabira
Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
May 17, 2018 17:38 ET (21:38 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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