Ocado enters South Korea with Lotte Shopping deal

By James Davey

LONDON (Reuters) -Ocado, the British online supermarket and technology group, has entered South Korea, one of the most mature e-commerce markets in the world, through a partnership deal with Lotte Shopping, the companies said on Tuesday.

Shares in Ocado soared 34% by 1241 GMT, paring 2022 losses to 62%, after Ocado and Lotte said they would develop a network of robotic warehouses, or Customer Fulfilment Centres (CFCs) as Ocado calls them, across South Korea to expand Lotte’s online grocery business.

Lotte becomes Ocado’s 12th partner across 10 countries.

“Lotte management recognises Ocado’s latest innovation as ahead of anything else in the market and its end-to-end solution as unmatched, differentiating its solution from others,” said analysts at RBC Europe, adding that the deal provides the market with renewed confidence in Ocado’s technology attracting more partners.

Ocado CEO Tim Steiner said the deal ranked in the top tier of its partnership agreements after deals in the United Kingdom, the United States and Japan.

“It’s a very significant market for us to move into,” he told reporters.

Six CFCs are planned by 2028, with the first scheduled to go live in 2025. Ocado’s in-store fulfilment technology will also be rolled out across Lotte stores from 2024.

The deal includes a suite of technological innovations from lightweight robots to hi-tech van routing systems that Ocado unveiled in January.

It will also introduce multi-storey CFCs for the first time, which unlock a wider range of property types for CFCs, enabling more efficient use of space in densely built environments.

FEES

Fees to be paid by Lotte to Ocado are similar to those agreed with its other international partners, which include Kroger Co in the United States, Aeon in Japan and Casino in France.

Lotte will pay certain fees upfront and during the development phase, then ongoing fees linked to both sales achieved and installed capacity.

The pair said the deal was exclusive, meaning they will not take other partners as long as expansion criteria are met.

Lotte Shopping, part of South Korea’s Lotte Group conglomerate, operates department stores, hypermarkets, supermarkets and e-commerce, with more than 1,000 stores nationwide and an annual revenue of 9.5 billion pounds ($10.9 billion).

It said the impact of the deal should be negligible on earnings in the current financial year as no cash fees will be recognised in revenue until operations start.

Ocado expects minimal additional capital expenditure in its 2023 financial year with the majority of additional capex in the 12 months prior to the opening of CFCs.

Steiner said new capital was not required.

He also said Ocado had a “strong pipeline” of potential new partners.

“We believe that we will sign more deals as our addressable market grows,” he said.

Ocado’s management also told analysts that they viewed Kroger’s purchase of Albertsons as very positive for Ocado. Ocado’s deal with Kroger is its largest.

Ocado Group’s shares have been hurt this year by the performance of Ocado Retail, its retail joint venture with Marks & Spencer.

($1 = 0.8685 pounds)

(Reporting by James Davey; editing by Sarah Young, Jason Neely, Ed Osmond and David Evans)