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Instacart faces new challenge with Kroger/Ocado tie-up

LOS ANGELES/NEW YORK, May 17 (Reuters) - U.S. grocery delivery company Instacart suffered a new setback on Thursday when Kroger Co, one of its major U.S. customers, announced a partnership with British automated online grocery service Ocado Group Plc.

Kroger's deal with Ocado - coming less than a year after Amazon.com bought key Instacart partner Whole Foods - puts more pressure on the 5-year-old San Francisco company that picks and delivers groceries for dozens of other retailers, including Costco Wholesale Corp, Walmart Inc's Sam's Club, Albertsons and Sprouts Farmers Market Inc.

Instacart currently delivers groceries for Kroger stores in 45 U.S. markets, including Ralphs in Southern California, Mariano's in Chicago and King Soopers in Denver.

Instacart did not immediately respond to requests for comment.

A Kroger spokesman said the Instacart relationship was unaffected by the Ocado deal, adding that it viewed them as "complimentary."

Kroger Chief Executive Rodney McMullen told Reuters it typically takes about two years to get Ocado's roboticized warehouses ready to fill orders and deliver groceries.

"Instacart is still the best partner for home delivery if one doesn't have dedicated e-commerce" operations, said Burt Flickinger, managing director of consultancy Strategic Resource Group.

Still, grocery industry analysts said the Kroger and Whole Foods deals could force a business model change or other strategic shift at Instacart, which so far has raised $1 billion from investors.

If the Ocado partnership gives Kroger the confidence to bring delivery in-house, "that will be disastrous for Instacart," said Neil Saunders, managing director of GlobalData Retail.

Whole Foods was Instacart's largest and most important customer last summer when Amazon said it was buying the natural and organic chain.

Whole Foods CEO John Mackey told Reuters this week that the chain's long-term delivery partnership with Instacart remained in place as it expands free two-hour delivery for Amazon Prime subscribers.

(Reporting by Lisa Baertlein in Los Angeles and Melissa Fares in New York; Additional reporting by Uday Sampath Kumar in Bengaluru; Editing by Peter Cooney)