Amazon (NASDAQ: AMZN) has lit a fire in the grocery market.
After breaking into the grocery delivery space with Amazon Fresh and then buying Whole Foods, the mega retailer is now getting ready to launch its own supermarket with Amazon Go.
But the battle for grocery e-commerce supremacy has recently gotten a whole lot more interesting as the U.S. supermarket giant Kroger (NYSE: KR) announced a strategic partnership with the U.K.’s purely online grocer, Ocado (OTC: OCDGF).
The announcement last week is a landmark technology licensing deal and sent shares of Ocado soaring up nearly 45% in a day, squeezing out short sellers, and sending the company’s valuation multiple in-line with Amazon’s. For the month, the stock is up nearly 60%.
Ocado’s new partnership with Kroger—the second largest grocer in the U.S.—could boost earnings before interest, taxes, and depreciation and amortization by roughly 100 million pounds by 2020, pushing it nearly 80% higher, according to analyst Marcus Diebel at JPMorgan.
This is a change in fortune for the online grocer. The company lost 70% of its value in the first 18 months of public trading. But in the last 6 months, the market cap of the company has more than tripled, surging to over $6.8 billion.
Ocado was founded in 2000 by three former Goldman Sachs bankers. The company has a two-pronged business model where it sells groceries directly to consumers, and licenses its technology to other companies.
Ocado is a best of breed in terms of automated fulfillment, creating customer-friendly interfaces to help facilitate efficient grocery ordering. This has led to the company being one of the few e-commerce grocery businesses that is actually profitable with an EBITDA profit of about 86 million pounds, or $116 million, in 2017.
The company’s technology automates the processing and packaging of online grocery orders, employing hundreds of robots in technologically advanced order fulfillment centers. And while Ocado has licensed its technology to a few notable partners, the Kroger deal is an entirely different beast.
As part of the deal, Kroger will take a 5% share of the company, worth around $247 million, while also licensing Ocado’s deliveries and warehousing technology. The deal is a “transformation licensing deal” that has “squashed skepticism about the validity of Ocado’s solution for online grocery retailing,” according to an RBC analyst group led by Sherri Malek.
According to Kroger chairman and CEO, Rodney McMullen, the deal to put Ocado’s robotic capabilities into 20 of Kroger’s warehouses over the next three years will help “speed up [Kroger’s] efforts to redefine the food and grocery customer experience.”
And “the deal will give Ocado… immense power to shape the future of the grocery industry in the U.S.” while also helping “Kroger better compete with Amazon, which is delivering online grocery orders from Whole Foods stores in several cities,” according to Business Insider.