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Why Ocado’s latest deal is more important than you might think
First-half results from online groceries business Ocado (OCDO) on 6 July are arguably less relevant than the company’s latest deal – a partnership with Spanish supermarket chain Auchan Retail for its Alcampo brand.
One reason why Ocado shares had stalled in 2021 after a strong run in 2020 was the lack of international deals to act as a catalyst for the share price, which has now been addressed.
Ocado has benefited from increased demand and focus on web-based food sales in the wake of the pandemic but travel restrictions had prevented management from traversing the globe to sign up new international customers for its technology system.
It licences the technology to global supermarkets to power massive warehouse fulfilment centres with the majority of the picking for shoppers carried out by robots.
A typical agreement sees Ocado incur up to £30 million of cost for the technology hardware and software for each warehouse with the partner paying for site construction. Ocado then books a cut of the sales from each of these fulfilment centres.
Now that the Auchan Retail deal has been struck and with global economies beginning to be unlocked, sentiment towards Ocado may improve as investors get increasingly confident in its ability to sign up more customers for its systems.
Importantly, Auchan operates across 13 different countries and the statement announcing the transaction confirms the partnership may be expanded into other geographies, creating scope for significant growth in the future.
Existing Ocado partners span territories as diverse as Japan, the US and France and include Aeon, Kroger, Sobeys, Morrisons (MRW), Groupe Casino, Coles Supermarkets, ICA Group, Bon Preu Group, and a joint venture with Marks & Spencer (MKS).
This latter venture is the most visible part of Ocado’s business to the average UK consumer and in addition to providing a revenue stream, it acts as a shop window for the benefits of the technology system.
Bank of America notes that the robust profit performance of the Marks & Spencer joint venture in the six months to 30 May is ‘evidence for Ocado’s partners and potential future partners that the grocery online model is profitable when run at full capacity’.
One of Shares’ top picks for 2021, Ocada remains an investment for patient investors with the company still loss making as it sinks the upfront cost required to get fulfilment centres up and running.