Ocado hails Swedish model as bags fourth overseas deal

Ocado Group has won a third major overseas deal in the past six months as it was signed up by Sweden's ICA, the second largest grocer in Scandinavia, to build its new online grocery business.

ICA, which has co-operative association of 1,300 stores across Sweden and a market share of around 36%, has signed up Ocado to launch an end-to-end online grocery service, which is expected to be up and running by the end of 2020.

Ocado and ICA will develop the first 'customer fulfilment centre' in the Greater Stockholm area over the coming three years, with ICA moving over its store-pick based operations to Ocado's Smart Platform robots.

ICA stores, which generated sales of SEK 106.5bn in 2017, are owned and operated separately by their individual retailers, with operations coordinated within the group, similar to Budgens in the UK. This, said Ocado, required it to adapt its model "to suit the needs of a different business model... demonstrating the adaptability of the platform".

The impact of the ICA transaction for Ocado is expected to be earnings neutral in the current trading year to the end of November, with "minimal" additional capital expenditure this year but additional, unspecified capex in future years as the development of the CFC project gets underway.

ICA 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.

Similar to its recent contracts with Group Casino in France and Sobeys in Canada, the contract will see Ocado provide front- and back-end website functionality, invest in the construction of a state-of-the-art automated warehouse within the CFC and provide last-mile delivery management technology.

In addition to this initial CFC, ICA and Ocado have agreed to consider developing other CFCs elsewhere in Sweden.

Luke Jensen, CEO of the Ocado Solutions division, said: "We are excited and proud to be partnering with another of Europe's leading grocery retailers.

"ICA has a strong track record of growth and innovation and our Smart Platform will give the ICA-retailers the opportunity to provide their customers with new levels of service, convenience and value. Our flexible, scalable and modular solution is uniquely positioned to address a fresh set of challenges and allow ICA deliver its ambitions for online."

Shares in Ocado climbed 5.5% to 585.8p in the first hour of trading on Wednesday.

"This is now the fourth international deal that Ocado’s solution business has signed over the last two years and the third in the last six months and shows that it continues to make progress as a licensee of its proprietary software and platform with international retailers," said broker Shore Capital.

"As ever, the development costs are front loaded and the latest deal with ICA is expected to be implemented by the end of 2020. Whilst we welcome the international deals we continue to questions their materiality. We ask when will these international deals make a fundamental difference to both revenues and the earning line and what will it do for ROCE?"

Analysts at Numis noted there was a "significant difference" versus previous deals in the level of complexity involved as the OSP model will be adapted to suit the needs of the co-operative business model.

"Reflecting the relative complexity of the deal, we expect Ocado’s cash outflows and subsequent fee income to be at higher levels than the deals with Sobeys and Casino, but suspect the net peak cash flow outflow will be similar (c.£30m)."