Ocado lands partnership deal with Australia's Coles

[LONDON] British online supermarket pioneer Ocado has signed a partnership agreement with Australia's Coles Group, its fifth major overseas deal in less than 18 months as food retailers around the globe meet the challenge of online competition.

The deal will see Ocado's technology and software develop Coles Online's grocery business in Australia.

Two robotic distribution centres - or customer fulfilment centres (CFCs) as Ocado calls them - will be built and go live within four years, one in Sydney and one in Melbourne.

Coles shares rose as much as 3.1 per cent.

Though Ocado has a 1 per cent share of Britain's grocery market, its 8.7 billion pound (S$15.5 billion) stock market valuation has been driven by the technology side of its business - providing international retailers with the infrastructure and software to develop their own online grocery businesses to compete with the likes of Amazon.

After struggling for years to post a profit it has flourished since late 2017, signing deals with US group Kroger Co, Casino in France, Sobeys in Canada, and ICA Group in Sweden.

Coles is one of Australia's largest retailers, trading from 818 supermarkets, 911 liquor stores, and 712 Coles Express petrol stations across the country and generating sales in full year 2018 of S$37.8 billion (22 billion pounds). It is already a market leader in online grocery retailing in Australia through Coles Online, with more than A$1 billion of annual sales.

Coles Online's plan is to serve customers in Australia's larger urban areas by fulfilling orders through Ocado's CFCs, with customers in less populated areas benefiting from Ocado's store-pick software.

Coles will pay Ocado upfront fees upon signing and during the development phase, then ongoing fees linked to both sales achieved and installed capacity within the CFC and service criteria.

The agreement is exclusive in Australia as long as certain conditions are maintained.

Ocado said it expected the deal to create significant long-term value to the business. It said it would be earnings negative in the current financial year as no cash fees will be recognised in revenue until operations start. Ocado expects minimal additional capital expenditure in full year 2019 with the majority of additional capex in the 18 months prior to the opening of the CFCs.

The Coles deal comes a month after Ocado announced a 1.5 billion pound retail joint venture in its home market with Marks and Spencer.

REUTERS