Japan's Aeon signs up Ocado in online grocery bet

TOKYO/LONDON (Reuters) - Japan’s biggest supermarket group, Aeon Co Ltd has hired British online grocery pioneer Ocado to develop its e-commerce business, hoping to fend off rivals such as Amazon as more customers buy groceries online.

Ocado shares leapt as much as 15% in early Friday trading as investors welcomed the latest partnership for the British company, whose technology deals have become more important than its original business of selling food online.

“Given that Japan must have plenty of rival automated robotic warehouse providers, this is quite a coup for the business,” said independent retail analyst Nick Bubb.

Internet grocery shopping has yet to take off in Japan, where consumers still often buy fresh produce on a daily basis. But growing numbers of working women and improved technology and logistics networks are expected to change that.

Aeon’s rival Seiyu, operated by U.S. retail giant Walmart Inc, launched an online grocery venture with e-commerce firm Rakuten Inc in 2018, aiming to compete with the likes of Amazon Fresh.

Aeon, which operates more than 21,000 stores and has about 100 million customers, plans to harness Ocado’s robotic warehouses, which it calls customer fulfillment centers (CFCs), and its software to create a distribution network serving the whole of the Japanese market.

The partnership anticipates Aeon will have an online grocery sales capacity of about 600 billion yen ($5.5 billion) by 2030 and 1 trillion yen by 2035.

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Initial CFCs will serve Japan’s Kanto region, with the first planned to go live in 2023, followed by others over the next two years.

Aeon will also use Ocado’s product-picking software within parts of its existing store network, and offer click-and-collect services from selected sites.

The Japanese firm did not say how much it was paying Ocado, but said the agreement included upfront fees, in addition to later payments which will depend on sales performance and capacity installation.

“We see Ocado as a state-of-the-art, exciting and transformative partner aligned with our strategy of accelerating Aeon’s digital shift to serve Japan’s consumers,” said Aeon CEO Motoya Okada.

The deal is Ocado’s first in Asia.

While Ocado’s retail business has only a 1.4% share of Britain’s grocery market, its technology has powered the group’s 8.4 billion pound ($10.8 billion) stock market valuation, enabling it to win partnership deals with supermarket groups including Kroger in the United States and Casino in France.

Ocado said it expected an additional 25 million pounds ($32.1 million) of operating costs in its fiscal 2020 year to implement the Aeon deal.

In February, Ocado and Marks & Spencer agreed a 1.5-billion-pound joint venture, signaling the end of Ocado’s long running supply contract with upmarket supermarket chain Waitrose in September 2020.

Reporting by Ritsuko Ando in Tokyo and James Davey in London; Editing by Clarence Fernandez and Mark Potter