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Coles signs online grocery delivery deal with Ocado in Australia

Australian supermarket chain Coles Group Ltd. said March 26 that it will use Ocado Group PLC's technology for end-to-end grocery delivery solutions in the country as part of a new exclusive services agreement with the U.K. online grocer.

The announcement of the deal, which is similar to Ocado's existing partnership with Kroger Co. in the U.S., sent Coles' shares up 2.52% to A$11.99 in early morning trading March 26 in Australia, while Ocado's shares closed up 1.91% at 1,255.5 pence on March 25 in London.

Under the agreement, Ocado will allow Coles to use its Ocado Smart Platform, a proprietary solution for online retailers that combine end-to-end software and technology systems with automated warehouses. The platform features an automated single pick fulfillment technology and a home delivery solution.

The Australian grocer expects the move to double its nationwide home delivery capacity and lead to an improved profit margin for Coles Online. It also expects the partnership to result in improved product availability, more regular delivery windows and a safer working environment for Coles employees, among other benefits.

Coles and Ocado will work together to build two automated customer fulfillment centers, or warehouses, in Melbourne and Sydney, which are expected to each have an estimated annual sales capacity of between A$500 million and A$750 million.

Coles expects a charge of A$130 million to A$150 million, inclusive of upfront Ocado fees, to build the warehouses over the four-year development and construction period. Both facilities are expected to be operational by the end of fiscal year 2023.

For its part, Ocado will be responsible for the installation of the material handling equipment in the automated warehouses, with the provision of ongoing maintenance of the equipment, according to the release. Coles will pay Ocado fees for the installation and maintenance of the equipment within the fulfillment sites and as well as for the licensing of the smart platform software.

In the U.S., Ocado and Kroger plan to open 20 fulfillment sites over the first three years of their agreement. The first two sites are planned for Ohio and central Florida.

Meanwhile, Coles said it will start migrating its delivery services to Ocado's online platform before the expected launch in 2023. The grocer assured that customers outside Melbourne and Sydney will still benefit from Ocado's online website, where orders will be fulfilled by the existing store-based network.

Apart from Kroger and Coles, Ocado has similar partnerships with France's Casino Guichard-Perrachon Société Anonyme, Canada's Sobeys Inc. and Sweden's ICA Gruppen AB (publ). It also recently formed a joint delivery venture with Marks and Spencer Group plc.

Meanwhile, the Ocado deal is Coles' latest major transaction since being spun off from Wesfarmers Ltd. in 2018.