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Kroger counters Amazon with Ocado alliance

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Kroger Co. is fighting back against Amazon.com Inc.’s incursion into the supermarket aisle and Walmart Inc.’s beefed-up e-commerce offering through a deal with U.K. online grocer Ocado Group Plc.

Kroger agreed to buy a stake in Ocado and license technology that helps other grocers run automated warehouses and deliver food to customers’ doors. The deal, the British company’s biggest yet and its first in the U.S., lifted its shares as much as 62 percent to a record in London.

“Kroger is one of the few national retailers in the U.S.,” Ocado Chief Financial Officer Duncan Tatton-Brown said on a call with reporters. “We are confident we have picked the right partner.”

American supermarkets could use a little help from the U.K. as they seek to expand their online sales. Amazon’s acquisition of Whole Foods Market Inc. last year generated waves in the $800 billion U.S. grocery industry, but digital offerings are still in their infancy there. Ocado said only 1 percent or 2 percent of U.S. food spending comes from e-commerce. That compares with more than 7 percent in Britain, according to Kantar Worldpanel.

The Kroger deal escalates a fight for leadership in the burgeoning business after Walmart Inc. in March announced plans to expand its grocery home-delivery service to more than 100 metro areas this year, with deliveries handled by services such as Uber Technologies Inc. Dutch grocer Ahold Delhaize NV, which gets the bulk of its 63 billion euros ($74 billion) of sales from U.S. chains such as Food Lion and Hannaford, aims to get 5 billion euros of sales online by 2020.

Online competition is heating up as pricing pressure squeezes profit margins, forcing grocers to get together. In the U.K., Tesco Plc has acquired wholesaler Booker, while J Sainsbury Plc has agreed to buy rival Asda from Walmart, which is taking over Indian e-commerce provider Flipkart. French retailers are forming purchasing alliances.

With estimated sales of $123 billion in the current fiscal year, Kroger is the second-biggest grocer in the U.S. behind Walmart. After deals such as a $13 billion acquisition of Fred Meyer Inc. in 1999 and a $2.5 billion purchase of Harris Teeter Supermarkets Inc., the Cincinnati-based company operates in about 35 U.S. states. It has 2,800 supermarkets and stores under brands including Ralphs.

Kroger shares were up 0.2 percent in early trading before U.S. markets opened.

Kroger and Walmart each offer click-and-collect services in more than 1,000 locations, according to Bloomberg Intelligence analyst Jennifer Bartashus. Kroger has been charging a $4.95 service fee.

The grocer will become the exclusive user of Ocado’s technology in the U.S., according to a statement Thursday. Kroger also agreed to buy new shares in the U.K. company, taking a stake of about 5 percent. The companies are working on identifying sites for three automated distribution centers this year and may open as many as 20 within three years.

The number of distribution sites Kroger is committing to is “materially ahead of anything we had expected,” wrote Bruno Monteyne, an analyst at Sanford C. Bernstein.

Ocado operates e-commerce platforms, and its technology helps run logistics systems. Delivering groceries is more complex than selling books or video games because food needs to be stored at the right temperature to ensure it doesn’t spoil. Ocado’s software helps trucks take the best route, so that deliveries arrive at the customer’s door within a one-hour window.

After years of trying without success to reach licensing agreements with traditional grocers, Ocado is moving to transform itself from an online retailer into a technology provider. The company struck its first major licensing deal with Casino Guichard-Perrachon SA of France in November, which was followed by agreements with Sobeys Inc. of Canada and Sweden’s ICA Gruppen AB.

“We have the capacity to sign more deals,” CFO Tatton-Brown said, adding that this agreement “makes a point: If you want to sign with us, you have to get on with it.”

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