Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Ocado's full delivery has finally arrived without substitutions or omissions.

The U.K. online grocery retailer said on Tuesday that it had signed a deal with Casino Guichard-Perrachon SA for the French supermarket to use its technology.

Unlike Ocado Group Plc's last international partnership with an unnamed regional European retailer -- which turned up in June three years late and with items missing -- this is the full shopping cart. It’s an agreement with a major supermarket in a sizeable market.

While online accounts for some 5-6 percent of French grocery sales, it is primarily focused on drive-through services, where consumers order online but collect their shopping by car. The home-delivery market is far less developed, and so ripe for a canny operator to make inroads.

Unsurprisingly, shares in Ocado rose as much as 28 percent on the news: this is what the company has been tantalizing investors with for four years.

Deal or No Deal
Ocado's agreements to licence its technology have driven its share price over the past two years
Source: Bloomberg

But there is still one niggle with the consignment.

The deal won't have any impact on earnings in the current financial year, which ends on Sunday. In the year to December 2018 it will be earnings neutral, as Ocado will have to incur about 15 million pounds ($20 million) of extra capital expenditure.

Thereafter it expects profits to expand as the partnership ramps up. The fees Ocado receives will be linked to the amount of delivery capacity that Casino opts for.

Ocado won't put a figure on how much that might be. But the warehouse that Casino will build to serve the greater Paris area will be bigger than Ocado's state-of-the-art facility in Andover, England, which is capable of fulfilling about 350 million pounds worth of sales a year.

Analysts at Bernstein expect the deal to add 6 million to 10 million pounds a year of pre-tax profit from 2021, once its fully operational. That's helpful, given that Ocado made pre-tax profit of 12.1 million pounds in the year to November 2016.

Profit Lift
Contracts to licence Ocado's technology should boost earnings in time
Source: Bloomberg

But Bernstein estimates it's less than the 12 million pounds of pre-tax profit that Ocado will generate from its partnership with Wm Morrison Supermarkets Plc this financial year.

As such, it doesn't justify the jump in Ocado's share price. This has caused its enterprise value to soar to about 19 times forecast earnings before interest, tax, depreciation and amortization, getting closer to Amazon.com Inc.'s 24 times.

Closing the Gap
Ocado's agreement with Casino has helped it close its valuation gap with Amazon
Source: Bloomberg

There is no doubt the deal with Casino is good news for Ocado. What's more, the two international partnerships so far should make it easier for it to convince other overseas grocers to sign up to use its technology.

But the share price is already assuming a successful implantation of the Casino agreement and more deals to come. Given how long it takes to negotiate these complex agreements, that's wishful thinking.

Ocado has finally managed to get this foreign deal from conveyor belt to doorstep. But there's no guarantee that others won't get stuck in the warehouse.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net