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Kroger to use Ocado technology for food distribution in US

Kroger Co. and Ocado Group PLC said May 17 that they agreed to a deal under which the U.S. grocer will exclusively use the U.K. online grocery retailer's technology for food distribution-related activities. As part of the deal, Kroger will acquire a 5% stake in Ocado.

In early morning trading in London, Ocado's shares soared 238 pence, or 43.1%, to 790 pence.

"We see Ocado as an innovative, exciting and transformative partnership in pursuit of our Restock Kroger vision, to serve America through food inspiration and uplift," Kroger Chairman and CEO Rodney McMullen said in a statement. "We are actively creating a seamless digital experience for our customers."

Under the terms of the deal, Ocado will help Kroger redefine the grocery customer experience in the U.S. with its Ocado Smart Platform, a proprietary end-to-end solution for online grocery services. It ranges from front-end website functionality to construction of state-of-the-art automated warehouses designed specifically for grocery e-commerce and last-mile routing management technology to optimize delivery truck efficiency, customer service excellence and punctuality.

In the joint statement, the companies said they were already working to identify the first three sites on which to develop automated warehouse facilities in the U.S. this year, adding that they will identify up to 20 over the first three years of the agreement. In the event of a failure to commit to the target capacity, Kroger will pay compensation to Ocado.

Kroger also agreed to pay monthly exclusivity and consultancy fees that will offset in part the total fees that are expected to be agreed upon between the two companies.

For Ocado, the agreement is the latest in a series of contract wins to take its technology into international markets. The company, which does not operate brick-and-mortar stores, inked a deal in November 2017 to provide its technology to France's Groupe Casino. A deal with Canada's Sobeys Inc. followed in January. On May 2, it signed a pact with Sweden's ICA Gruppen AB (publ).

Kroger generated revenue of $122.7 billion in fiscal 2018 ended Feb. 3, making it an important partner for Ocado, which said it would discontinue discussions with other U.S.-based retailers.

Kroger in October 2017 unveiled a plan dubbed Restock Kroger to address the rapid transformation of the retail industry and the growth of online selling. As part of the initiative, it said it would accelerate digital and e-commerce efforts.

Cementing its partnership with Ocado, Kroger will subscribe for up to 33,146,200 new ordinary shares in the capital of Ocado, equivalent to 5% of the existing issued share capital, at a value of £183 million.

"The opportunity to partner with Kroger to transform the way in which U.S. customers buy grocery represents a huge opportunity to redefine the grocery experience of Kroger's customers and create value for the stakeholders of both Kroger and Ocado," Ocado CEO Tim Steiner said in a statement. "As we work through the terms of the services agreement with Kroger in the coming months, we will be preparing the business for a transformative relationship which will reshape the food retailing industry in the U.S. in the years to come."

Ocado and Kroger said they would explore value-neutral alternatives to Ocado's normal fee structure to reduce the initial capital requirements for the online retailer, compensated by an appropriate reduction in ongoing fees.

Ocado said it expected the earnings impact of the deal with Kroger to be neutral in 2018.