Shares in online groceries shopping business Ocado had rocketed to a peak of 997.4 pence by lunchtime today, having closed yesterday at 554.2 pence. The remarkable climb, which equated to over 57% over half a trading day, was sparked by news breaking that a deal had been agreed that will see US supermarket chain Kroger take a 5% stake in the business. The deal will also involve Kroger using Ocado’s robotic warehouse technology across its US business.
The scale of the share price jump was intensified by hedge funds holding significant short positions on Ocado’s stock. They were forced to frantically buy Ocado shares in an effort to stem the losses on those short positions as the share price rose on news of the Kruger deal. Over the past three hours Ocado’s share price has dropped back again to 788 pence, which still represents a gain of almost 35% on yesterday’s close. It is safe to say that even if there is a further easing of gains from the inter-day peak, anyone investing online in Ocado shares will have made a killing today.
Hedge funds had been shorting Ocado on the basis that it was thought the company would struggle to establish the new business partnerships required to justify its share price. However, in recent months the online supermarket has been making good progress on that front. An agreement was reached earlier this month to build the online business for Swedish supermarket chain ICA. Partnerships with Sobeys of Canada and French retailer Groupe Casino were also recently completed.
However, today’s deal is on an entirely different level to the year’s other success stories. The US groceries market is one of the biggest in the world and Kroger one of its major operators. The agreement gives Kroger exclusive rights to Ocado’s warehouse technology and means ongoing discussions with two other US retailers will be terminated. The US supermarket giant will pay Ocado “monthly exclusivity and consultancy fees which will offset in part the total fees that are expected to be agreed between the two parties”.
Ocado’s automated robotic warehouse technology will first be installed in 3 Kroger warehouses before another 17 are upgraded over the first three years of the partnership. The online groceries sector is surprisingly under-developed in comparison with Europe. In the UK, 7% of all groceries shopping is now done online and in France between 4% and 5%. In the USA it is still only 1.5%, leaving huge untapped potential. The big supermarkets are now making a land grab for the online market and Walmart, the US market leader and current owner of Asda, expects to see 40% growth in its online sales this year.
Ocado finance director Duncan Tatton-Brown capitalised on news of the Kroger deal to make a bullish call to action to any companies considering partnerships and still needing a nudge. He stated:
“Do we have unlimited capacity? No. The message to anyone who was thinking of signing with us, is that you’d better get on with it.”
Laith Khalaf, senior analyst at Hargreaves Landsdown, the UK’s largest online stock broker and investment supermarket commented on today’s share price jump:
“As one of the most shorted stocks in the UK stock market, this deal will be a poke in the eye for the hedge funds who have bet against Ocado because of its eye-watering valuation.”
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