Not just Ocado: How Kroger is increasing store productivity for digital

Kroger has spent a lot of time talking about the evolution of the network of automated e-commerce warehouses it’s building alongside Ocado, making it sound like these robotic facilities are the future of digital fulfillment for the ‘business.

But in a business update on Friday, Kroger executives underscored the stores’ continued importance to its digital strategy, saying they are the crucial other half of the online ecosystem the company is building. building.

Yael Cosset, Kroger’s chief information officer, said the ability to leverage stores as well as separate facilities of varying sizes is a unique advantage for the company over competitors who primarily use one asset or the other.

“On the one hand, the store offers a lot of options to customers taking advantage of its proximity, but on a limited scale. On the other hand, large installations provide reliability, scalability and efficiency, but limit some of the paths we can capture,” he said. “That’s exactly why we’ve structured our ecosystem to take advantage of both, forming a dynamic network with our stores.”

This elevation of its stores in the discussion of the future of online grocery shopping for the nation’s largest supermarket chain reflects the dramatic and, in many ways, unexpected evolution of e-commerce in recent years.

Kroger’s tie-up with Ocado in 2018 to build a network of automated warehouses across the United States seemed like a bet on a delivery service that prioritized scale and efficiency over speed and proximity. The pandemic has generated a tidal wave of e-commerce demand, bolstering Kroger’s ambitions. But shoppers are also showing a growing preference for pickup as well as instant delivery and meal delivery – services centered on the company’s stores.

On Friday, Cosset and CEO Rodney McMullen repeatedly mentioned Kroger Delivery Now, the 30-minute delivery service he launched last year with Instacart, noting that this offer helps the company fill impulse purchases and other one-time delivery opportunities with existing buyers.

“This new offering has been profitable from day one,” Cosset said.

Kroger sees a more than $1 billion opportunity in rapid trading over the next few years, Cosset said.

Kroger bags at someone’s door.

Courtesy of Kroger

Kroger has also increased pickup capacity at more than 400 stores and reduced wait times for curbside service by 20% while improving cost of service by 15% since 2019, said Mary Ellen Adcock, vice – Chief Operating Officer of the company. In the area of ​​food delivery, Kroger hosts shadow kitchens in a few stores and has partnered with DoorDash to deliver sushi from select locations.

Leveraging its stores for digital growth puts Kroger in good company. Walmart and Target have spoken in recent weeks about the importance of using their department stores to power same-day fulfillment and other services like door-to-door delivery.

However, these companies have also positioned their reliance on stores as a cost-cutting measure, while Kroger’s additional warehouses continue to face considerable skepticism from the investment community. Although the robotic facilities promise to help Kroger fulfill online orders more efficiently and enter new markets like Florida and the Northeast, analysts are still unconvinced of its ability to overcome high costs and stay one step ahead of its competitors.

However, this construction continues apace, with three major fulfillment centers now operational and new sites announced at a rapid pace. Friday, Kroger said it would add spoke facilities in Austin and San Antonio, Texas, as well as Birmingham, Alabama, to its list, adding to other “radiated” warehouses in markets like Oklahoma City, Oklahoma and Louisville, Kentucky, which also interface with larger Customer Order Fulfillment Centers (CFCs) as stores.

Analysts posed some questions to management about the profitability of its tie-up with Ocado after Friday’s presentation.

“How would you refute the skeptical argument that Kroger was going to have to share the profitability of its digital business, which could put it at a disadvantage compared to other big players like Amazon or Walmart, who don’t have a similar type of relationship? in love?” asked Michael Lasser, equity research analyst at UBS.

McMullen and other executives said the automated facilities will help Kroger increase household spending and loyalty, and add millions of new customers in markets where it does not operate stores.

“If you look at our net promoter scores, it’s in Apple-like league,” McMullen said, referring to the satisfaction rating shoppers give to its Kroger delivery service that fulfills orders from automated installs.

McMullen also said he sees Ocado as a “strategic partner” that develops cutting-edge technologies, such as new routing systems and warehouse robots, that could help make its fulfillment network even more efficient.

Kroger’s new digital loyalty program, Boost, is helping to increase volume at its hangars, with 30% of shoppers ordering groceries from its Monroe, Ohio, CFC now enrolled in the program, said Stuart Aitken, chief merchant and marketing director of the company.

A Kroger delivery truck.

Courtesy of Kroger

The full scale and capabilities of the automated half of Kroger’s online ecosystem are still being rolled out. And it remains to be seen how the Ocado-built facilities, which have been announced in sizes ranging from massive CFCs to a micro-distribution center in Florida, could also support some of the services currently centered on Kroger stores. The South Florida microsite, for example, will offer 30-minute service to shoppers in that immediate market, where Kroger does not operate any stores.

By the end of 2023, Kroger aims to reach $20 billion in online sales, double the amount achieved in 2020.

On Friday, Kroger also highlighted progress in other strategic “pools” such as fresh produce, private label and data science. The company has introduced supply chain management steps that have increased the length of time its fresh produce can stay on the shelves.

Kroger’s private label brands account for $28 billion in sales, and this year the company plans to elevate its core Kroger brand, which accounted for nearly $15 billion in sales last year, to attract consumers from more more price conscious. The company also plans to accelerate growth in its retail media business, which helps bolster digital profitability.

On Thursday, Kroger reported full-year sales and guidance that beat Wall Street expectations. This year the company plans to reach Comparable store sales excluding fuel growth of 2% to 3% and adjusted earnings per share of $3.75 to $3.85. Kroger has increased its capital expenditure budget to between $3.8 billion and $4 billion.

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