All things come to those who wait - and Ocado finally delivered the news that retail sector watchers have been waiting for by announcing a major international deal with French conglomerate Groupe Casino, owners of Monoprix.
The deal, which is limited to Casino’s French operations for now, will see the two firms collaborate to build a customer-fulfilment center (CFC) kitted out with Ocado’s robotics and picking software to serve customers of the higher-end Monoprix brand, specifically in and around Paris and in the Normandy and Hauts de France regions.
Casino Chief Executive Jean-Charles Naouri said of the deal:
This agreement is a major leap in terms of quality: 50,000 food items will be offered in the first stage to customers in the Greater Paris area with precise and speedy delivery at home and through a platform which makes it achievable to do this profitably.
For Ocado, the news of the tie-up comes as a significant relief. The online grocery firm has bet the farm on building partnerships with international retailers to adopt its e-commerce and robotics tech. For several quarters now it’s hinted at deals, but these have either been ‘jam tomorrow’ or so lacking in detail as to be worthless in terms of judging how succesful the strategic direction has been.
There was one unidentified international deal cited back in the summer, but this is the first time that a major user has broken cover. Ocado CEO Tim Steiner clearly hopes that this is the first of many:
We expect this deal to be one of many successful collaborations with leading retailers the world over.
Well, only time will tell about that. But the French tie-up did cheer investors who sent Ocado stock up 28% on the news, although how much of that is attributable to a release of pent-up frustration isn’t entirely clear. There’s a suspicion that much of the investor enthusiasm comes with an unspoken ‘at last!’ aspect.
As Andrea Felsted notes over at Bloomberg, there’s a lot of over-excitement here, citing analysis from Bernstein:
Analysts at Bernstein expect the deal to add 6 million to 10 million pounds a year of pre-tax profit from 2021, once its fully operational. That's helpful, given that Ocado made pre-tax profit of 12.1 million pounds in the year to November 2016.
But Bernstein estimates it's less than the 12 million pounds of pre-tax profit that Ocado will generate from its partnership with Wm Morrison Supermarkets Plc this financial year. As such, it doesn't justify the jump in Ocado's share price…There is no doubt the deal with Casino is good news for Ocado. What's more, the two international partnerships so far should make it easier for it to convince other overseas grocers to sign up to use its technology.
But the share price is already assuming a successful implantation of the Casino agreement and more deals to come. Given how long it takes to negotiate these complex agreements, that's wishful thinking.
Other market watchers were also cautious about getting too worked-up about Ocado’s prospects, although George Salmon of Hargreaves Lansdown was more upbeat:
There’s never been much doubt about Ocado’s technology, but to what extent the group can monetise its wondrous whirring machines has long been debated. The news that a major French retailer has signed an agreement to utilise its software should go some way to swaying investors sentiment more conclusively in Ocado’s favour. While we’ll need to see more deals come through, this development has kick-started Ocado’s transformation from niche British retailer into an international provider of game-changing technology.
For his part, Ocado’s Steiner himself seemed keen to dampen down excitement levels:
We aim to sign multiple deals in the medium term and I don’t think today’s announcement will do any harm to our prospects of doing that - but you shouldn’t expect one per week.
That’s particularly true in France as the Casino deal contains an exclusivity clause that prevents Ocado from signing a deal with other French supermarkets as long as Casino commissions more warehouses “within a certain timeframe”. Casino holds more than 11% of the French supermarket sector.
One swallow doesn’t make a summer, but there’s no doubt this is encouraging news for Ocado and its strategy as it looks ahead to a 2018 in which the competition from Amazon in the online grocery sector is only going to get tougher. Now Steiner and his team need to close some more deals - there are ongong rumours of a Swedish deal in the pipeline - while successfully delivering on the Casino use case. Meanwhile it’s worth checking out Phil Wainewright’s recent look at Ocado’s robotic warehouse tech to understand what all the fuss is about.