Kroger has spent a lot of time talking about the evolving network of automated e-commerce warehouses it’s building alongside Ocado, creating the impression that these robot-packed facilities are the future of digital fulfillment for the company.
But during a business update on Friday, Kroger executives stressed the ongoing importance of stores to its digital strategy, saying they are the crucial other half of the online ecosystem that the company is building.
Yael Cosset, Kroger’s chief information officer, said the ability to leverage stores as well as separate facilities of varying sizes amount to a unique advantage for the company over competitors that primarily utilize one asset or the other.
“On one hand, the store offers a lot of options to customers taking advantage of its proximity, but limited scale. On the other hand, large facilities offer reliability, scale and efficiency, but limit some of the trips we can capture,” he said. “This is exactly why we have structured our ecosystem to leverage both, forming a dynamic network with our stores.”
This elevation of its stores in the discussion about the future of online grocery for the nation’s largest supermarket chain reflects the dramatic and, in many ways, unexpected ways e-commerce has evolved over the past few years.
Kroger’s tie-up with Ocado back in 2018 to build a network of automated warehouses across the US seemed to be a bet on delivery service that prioritized scale and efficiency over speed and proximity. The pandemic 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 that center on company stores.
On Friday, Cosset along with CEO Rodney McMullen mentioned numerous times Kroger Delivery Now, the 30-minute delivery service it launched last year with Instacart, noting that offering is helping the company fill impulse buys and other unique delivery occasions with existing shoppers.
“This new offering was profitable on day one,” Cosset said.
Kroger sees a more than $1 billion opportunity in quick commerce over the next few years, Cosset said.
Kroger has also expanded pickup capacity at more than 400 stores and cut wait times for curbside service by 20% while also improving cost-to-serve by 15% since 2019, said Mary Ellen Adcock, the company’s senior vice president of operations. In meal delivery, Kroger is housing ghost kitchens inside a few stores and has partnered with DoorDash to deliver sushi from select locations.
Leaning on its stores for digital growth puts Kroger in good company. Walmart and Target have spoken in recent weeks about the importance of using their large stores to fuel same-day fulfillment and other services like ship-to-home.
However, those companies have also positioned their reliance on stores as a cost-saving measure, whereas Kroger’s additional warehouses continue to face considerable skepticism from the investment community. Although robot-packed facilities promise to help Kroger more efficiently fulfill online orders and penetrate new markets like Florida and the Northeast, analysts aren’t yet sold on their ability to overcome high costs and stay ahead of competitors.
That buildout nevertheless continues apace, with three large customer fulfillment centers now operating and new sites being announced at a rapid clip. On Friday, Kroger said that it will add spoke facilities in Austin and San Antonio, Texas, along with Birmingham, Alabama, to its roster, adding to other “spoke” warehouses in markets like Oklahoma City, Oklahoma, and Louisville, Kentucky, that interface with larger customer fulfillment centers (CFCs) as well as stores.
Analysts posed a few questions to manage about the profitability of its Ocado tie-up following the presentation on Friday.
“How would you refute the skeptical argument that Kroger was going to have to share in the profitability of its digital business, which could put it at a disadvantage amongst other large players like Amazon, or Walmart, who don’t have a similar type of relationship?” asked Michael Lasser, equity research analyst with UBS.
McMullen and other executives said that the automated facilities will help Kroger win additional household spending and loyalty, and add millions of new customers in markets where it doesn’t operate stores.
“If you look at our net promoter scores, it’s up in the Apple-type league,” McMullen said, referring to the satisfaction rating shoppers are giving its Kroger Delivery service that fulfills orders from the automated facilities.
McMullen also said he views Ocado as a “strategic partner” that’s developing leading-edge technology, like 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 drive volume to its sheds, with 30% of shoppers that order groceries from its Monroe, Ohio, CFC now enrolled in the program, said Stuart Aitken, the company’s chief merchant and marketing officer.
The full scale and capabilities of the automated half of Kroger’s online ecosystem are still unfolding. And it remains to be seen how the Ocado-built, which has been announced in sizes ranging facilities from massive CFCs to a micro-fulfillment center in Florida, might also shoulder some of the services that currently center on Kroger stores. The micro site in South Florida, for instance, will offer service in as soon as 30 minutes to shoppers in that immediate market, where Kroger doesn’t operate any stores.
By the end of 2023, Kroger aims to hit $20 billion in online sales, which is double the amount it achieved in 2020.
Kroger on Friday also outlined progress in other strategic “moats” like fresh products, private label and data science. The company has introduced supply chain management steps that have increased the amount of time its fresh products can sit on shelves.
Kroger’s private label brands account for $28 billion in sales, and this year the company plans to elevate its main Kroger brand, which accounted for nearly $15 billion in sales last year, to appeal to price-conscious consumers. The company also plans to accelerate the growth of its retail media business, which is helping Bolster digital profitability.
On Thursday, Kroger reported top-line sales and full-year guidance that exceeded Wall Street’s expectations. This year, the company plans to achieve 2%-3% growth in comparable store sales excluding fuel and adjusted earnings per share of $3.75-$3.85. Kroger increased its capital expenditure budget to between $3.8 billion and $4 billion.