Ocado inks Kroger deal, with first three orders in weeks

Ocado expects to receive orders for the first three US online shopping warehouses from grocer Kroger in the coming weeks after the pair signed up to a formal services and operational agreement.

Having announced advanced talks in May about the online grocery specialist potentially building up to 20 so-called customer fulfilment centres for Kroger over a period of three years, the pair have now signed the deal, with similar terms and fee structure to other transactions Ocado has agreed around the world, combining up-front fees and ongoing capacity fees.

As part of the new master services agreement, Kroger has confirmed that it will order 20 CFCs and Ocado has agreed to finance the first three of them until a final funding structure has been finalised. The standard £30m up-front cost for each of the high-tech warehouses will require a peak spend of £90m, which still leaves plenty of room in Ocado's £500m banking facilities.

The FTSE 100-listed group will install and maintain the robots for the CFC "sufficient to provide an agreed level of throughput", with an agreed target for Kroger to go live with a local online shopping service within around two years of each order being placed.

While the first three CFCs will have funding requirements similar to earlier deals, the pair are continuing to discuss new "value-neutral alternative structures that would result in a lower capital commitment per CFC by Ocado in order to ensure that future CFCs are funded in a way that makes best use of the funding capacities of both parties".

Luke Jensen, boss of the Ocado Solutions division, said: "We are delighted to have signed this services agreement with Kroger which sets out the key parameters for our working relationship going forward. The Kroger and Ocado teams have been working hard for some time to prepare for the opening of the first CFCs in the United States. We are very excited at the prospect of helping Kroger bring new services and value to its customers and transform the food retail market in the US".

Ocado shares, which had fallen 29% since topping £11 three months ago, were up more than 5% to 843.4p after an hour of trading on Tuesday.

Analysts at Ocado house broker Numis said: "We are reassured that a detailed agreement has been reached, although there are few surprises within the disclosed terms. Looking further out, we see the initial 20 CFC commitment as a staging post rather than an end game, and see scope for a significant multi-year CFC roll-out thereafter."