Ocado Group plc (LONLOCDO) and The Kroger Co. announced that they have signed service and operational terms including how Kroger will order Customer Fulfilment Centres and the basis on which Ocado will now develop and operate those sites. This is the future services agreement referred to in the announcement made on 17 May 2018.
Under the terms of the agreement, Kroger is expected to order 20 CFCs over the first three years of the agreement, and order the first three CFCs by the end of 2018. The terms and fee structure are similar to those for other transactions to-date combining up-front fees and ongoing capacity fees.
As with other recent deals, Ocado has agreed to install and maintain modules of Mechanical Handling Equipment (“MHE”) sufficient to provide an agreed level of throughput. The target is for Kroger’s CFCs to go live within approximately two years of each order being placed.
In order to expedite the opening of CFCs in the US, the first CFCs ordered in 2018 will have funding requirements similar to earlier deals.
The two parties remain committed to exploring 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. Discussion on these revised payments terms has now started and a further agreement is expected to be announced in due course.
Further details on the location of the first three CFCs will be made public by Kroger within the next several weeks.
Expected financial impact for Ocado
Ocado expects the earnings impact of the Master Services Agreement to be neutral in FY18. Up to the point when the final funding structure has been finalised, Ocado will finance Kroger’s CFCs in a similar basis to previous deals. We do not expect that this will involve more than the first three CFCs. The expected peak cumulative net outflow for Ocado of these initial three CFCs is £90m. With over £500m of financing headroom, Ocado has more than sufficient funds to cover this.
Luke Jensen, CEO of Ocado Solutions, 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”.
Alex Tosolini, Kroger’s Senior Vice President of Business Development, said:
“This is a significant step toward both solidifying our partnership with Ocado and redefining the Kroger customer experience. The alliance will bring to the U.S. Ocado’s unparalleled innovation and technologies. This is exciting news and will help accelerate our vision to serve America through food inspiration and uplift.”
