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Coles share price higher after announcing agreement with Ocado

In morning trade the Coles Group Ltd (ASX: COL) share price has pushed higher after announcing an exclusive services agreement with Ocado Group plc.

At the time of writing the supermarket giant’s shares are up 3% to $12.04.

What is the agreement?

Coles has entered into an exclusive services agreement with Ocado to bring the world’s leading online grocery platform, automated single pick fulfilment technology, and home delivery solution to Australia before the end of FY 2023.

UK-based Ocado has been at the forefront of innovation and success in disrupting the traditional grocery market for over a decade and last year announced a similar deal with U.S. supermarket behemoth Kroger.

According to the release, Ocado will partner with Coles in Australia to launch an end-to-end online grocery shopping solution. This includes:

  • A significantly enhanced customer experience, supported by Ocado’s entire end-to-end proprietary software applications and technology solutions required to operate a world class online grocery business, known as the Ocado Smart Platform, which will be available to Coles’ customers Australia-wide by FY 2023.
  • Two state-of-the-art automated customer fulfilment centres (CFCs), one located in each of metropolitan Melbourne and Sydney. Ocado will be responsible for the installation of the material handling equipment in the CFCs, including the provision of ongoing maintenance of the equipment.
  • Last-mile routing management technology to optimise delivery efficiency and customer service.

What is the cost?

As you might expect, such agreements don’t come cheap. Management advised that Coles will pay Ocado fees for the installation and maintenance of the equipment within the CFCs and licensing of its software.

Coles’ capital expenditure inclusive of Ocado upfront fees, is expected to be approximately $130 million to $150 million over the development and construction period.

But it certainly appears to be a worthy investment. Management estimates that each CFC has a sales capacity of between approximately $500 million and $750 million per annum. This will double Coles‘ current home delivery capacity Australia-wide and is expected to lead to an improved profit margin.

The company’s CEO, Steven Cain, appears to believe the partnership is a big step forward for the company.

He said: “Ocado is singularly focused on online grocery shopping, and as a result, has become the leading solution provider in the world. We are delighted to be partnering with them to make life easier for Coles’ customers here in Australia. Ocado’s ongoing investment and retail partnerships around the world will help us continue to improve our offer into the future.”

Should you invest?

Although it will be a few years before the company benefits from this investment, I believe it is a great investment and one which will support its long-term earnings growth.

In light of this and the recent pullback in its share price, I think Coles would be a great buy and hold investment option for investors along with former parent Wesfarmers Ltd (ASX: WES).

Furthermore, I would choose them both ahead of rival Woolworths Group Ltd (ASX: WOW) at this point for valuation reasons.

As well as Coles, I think these dividend shares would be great options for income investors.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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