Stores? Kroger don’t need no stinking stores

Discussion
Photo: Kroger
Oct 13, 2021

Kroger may not have found the treasure of the Sierra Madre, but the grocery giant appears to have struck grocery retailing gold with its use of automated warehouses, spoke hubs and micro-fulfillment centers to move into markets without having to open stores.

The nation’s largest supermarket operator announced yesterday that it plans to expand Kroger Delivery, including into markets where it currently has no physical store presence (Northeast U.S.) and expand in another (Florida) where it first began its digital-only push earlier this year.

Kroger entered the Central Florida market and discovered that consumer demand and its technological prowess using Ocado’s automated fulfillment tools enabled it to expand more rapidly than originally anticipated. The retailer claims high levels of repeat orders and net promoter scores from customers.

The company opened its first large fulfillment shed in Groveland and has since added “spoke” sites in Jacksonville and Tampa. Two smaller fulfillment centers will be added in South Florida enabling Kroger to serve customers in as little as 30 minutes from a selection of 10,000 food products and non-food essentials and deliver same- or next-day orders to customers choosing from over 35,000 items.

“The acceleration of Kroger Delivery continues with these new facilities and our continued focus on creating career opportunities and serving customers through interconnected, automated and innovative fulfillment models that cater to different and accretive grocery shopper missions in both new and existing geographies,” said Gabriel Arreaga, Kroger’s senior vice president and chief supply chain officer. “We have a pipeline of sites in development across the U.S., with several scheduled to open next year, and we’re excited to continue delivering the Kroger experience to more doorsteps.”

Kroger said it will enter the Northeast for the first time, offering same-day and next-day grocery delivery. The retailer is scheduled to open one of its Ocado facilities in Frederick, MD, next year.

Each of the sheds is expected to handle up to $700 million in orders annually and to operate more efficiently and cheaply than present methods. Kroger is extending the reach of the sheds, which are designed to cover up to 90 miles, with the addition of spoke locations, as in Florida.

DISCUSSION QUESTIONS:  What is your takeaway from Kroger’s rollout of the Ocado system in Florida and elsewhere? How will this affect what other retailers are doing in the online grocery space?

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"Not having stores may be efficient, but it will be interesting to see if they can drive an appropriate share of voice without physical locations."

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26 Comments on "Stores? Kroger don’t need no stinking stores"


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Neil Saunders
BrainTrust

I interviewed the Ocado CEO at a conference a couple of years ago. He told me that Kroger deliberately picked a combination of locations for their first automated warehouses so they could understand the impact in different markets. One of the choices they made was Florida, to see how the model would work in a region where they had no stores. Clearly that has gone well given the push into similar markets. All that said, it would be interesting to do a deep dive on the profitability of such operations. It is worth remembering that Kroger benefits from huge economies of scale from its operations across the U.S. If it were online only across the whole country, the economics would change substantially and for the worse – as Ocado’s own model in the UK demonstrates.

Ken Morris
BrainTrust

Kroger obtained the rights to the Ocado system in the U.S. I tried to get Ocado involved in an MFC selection earlier this year but they could not play. The future of online grocery has been secured by the COVID-19 pandemic with consumers’ online adoption curve being altered by three to five years. Dark stores and hybrid hub-and-spoke MFCs can pick and pack at 10+ times the rate of human pickers. That rate will only increase as the technology improves the pick times, the price of store associates increases and the availability of associates willing to work plummets. Kroger is prescient in their decision to lock up Ocado and roll out this technology.

Rick Watson
BrainTrust

I think Kroger will have a similar problem to D2C brands when entering a new market without stores – no one will know or care who they are. They will not ignite growth in these areas without building store infrastructure. It’s unclear to me that this new approach will be profitable.

Bob Amster
BrainTrust

I suspected that, but you said it!

Michael La Kier
BrainTrust

Kroger selling where they have no stores is genius — if they can get delivery costs down. Not having stores may be efficient, but it will be interesting to see if they can drive an appropriate share of voice without physical locations.

Christine Russo
BrainTrust

This innovation is incredible and a great proof of concept for other grocers and large scale retailers. It checks the boxes on new-gen retail with micro-fulfillment, automation, and more. Kroger gets extra points for keeping it in-house and not using a third party.

Oliver Guy
BrainTrust

Kroger’s work with Ocado is clearly going to help them. Ocado have proven their approach under their own brand in the UK and are now white-labelling it globally. It is likely that Ocado will want to offer it to other grocers – although the commercial terms may prevent them from doing this for a time depending on how Kroger negotiated.
Other retailers may well look at other providers or combinations thereof – there are multiple examples of niche vendors appearing in the automated picking and micro-fulfillment area.

Rich Kizer
BrainTrust

How will the Ocado system in Florida and elsewhere affect what other retailers are doing in the online grocery space? It will force change for everyone in market. If I were in the business of manufacturing shopping carts, I’d be concerned as I look down the road. Remember the neighborhood grocery store where everyone knew your name? Where did they go because of innovation? Any grocery store today needs to buy their ticket to this rapidly moving, changing ultra-competitive, consumer-focused market.

Lee Peterson
BrainTrust

This is one of the most interesting ideas yet out of the Kroger PR department. In theory I like it but, in reality, I believe the hybrid model (i.e.; some stores, lots of e-commerce) is the way to go. It will be interesting to see if A.) they stick to their plan and don’t open stores and B.) if they do that, what happens.

There’s a reason Kroger is not in that market already: this is full-on Publix territory. So that’s another interesting element at play here. Can they use e-commerce only to compete with a dominant market force? I’d bet not but, given the rate of e-commerce acceptance since 2020, I might lose that bet.

Rick Watson
BrainTrust

No way Kroger competes with Publix with this strategy. Stores will either be coming on the heels of this, or Kroger will be exiting eventually due to high CAC and low profit per unit.

Jeff Sward
BrainTrust

If this works, it will demonstrate the extendability of a strong brand enabled by efficient logistics. We already know that physical stores boost the e-commerce business in a given area, but this scenario may test the “necessary but not sufficient” equation. The brand is the store, through whatever channel they execute.

Dick Seesel
BrainTrust

There are at least two paths to successful omnichannel retailing. The first (see Walmart, Target, Kohl’s and others for examples) is to leverage a big physical footprint into e-commerce and related services like BOPIS or “ship to store.”

The second path involves the transition from online-only to physical stores. (Amazon is the obvious example here, but there are plenty of other websites that have opened storefronts too.) Kroger’s partnership with Ocado suggests they are following the second approach, but their expertise in running actual locations may point toward an eventual store expansion into the Mid-Atlantic and Northeast regions.

Rich Kizer
BrainTrust

Keep in mind that even if your market has never seen a Kroger store, it most likely has heard of this behemoth grocer. That certainly makes new markets much easier to crack.

Mohamed Amer
BrainTrust

I love the reference to the John Huston classic! The Ocado system and the crafting of innovative hub-and-spoke networks expand the company’s strategic horizon. The reason Kroger doesn’t need physical stores in a new trade area is their existing national brand coupled with clever localized marketing. I won’t be surprised if Kroger introduces physical stores, at some point, in these new markets to leverage the anticipated success.

Steve Montgomery
BrainTrust

While Kroger may not yet have brick-and-mortar stores in these areas, there are undoubtedly people in those markets who are familiar with the brand having moved there from areas where Kroger has stores. The question that arises is, is this is a long-term play or a way for Kroger to create more brand awareness and/or test market acceptance and, eventually, enter the market with brick-and-mortar locations?

Melissa Minkow
BrainTrust

This is a very creative way to build a presence in a market without utilizing the conventional retail model. Kroger is establishing itself nationally via a modern retail strategy. I expect many more retailers to initiate partnerships that allow them access to consumers they wouldn’t be able to access conventionally.

Dave Bruno
BrainTrust

I think having physical stores in a market is less important in grocery than in most other retail verticals, and therefore I think this could be a very significant advancement for Kroger. The challenge, as always, is brand-building and awareness in new markets, but their early successes indicate they have figured out the marketing side. Kudos to Kroger – I wish them well and will be watching for further updates.

Liz Crawford
BrainTrust

This is an interesting idea – like an Amazon for grocery only. However in the Northeast, the Kroger name isn’t well known. Or least it isn’t top-of-mind. So the advertising will need to be pretty robust, including online and out-of-home.

Furthermore, for those markets like the Northeast where grocery shopping habits are well established and several retailers are operative, there needs to be a compelling reason to switch. What is their point of difference versus say, Stop & Shop or ShopRite? It seems like one more player in a crowded space, regardless of delivery mechanisms.

Brian Cluster
BrainTrust
I was fortunate to hear the CEO of Kroger (Rodney McMullen) at Groceryshop several weeks ago. It’s obvious that they are not thinking “build it and they will come” with the stores anymore. They are looking at the grocery business as an ecosystem and physical stores are only one component of the ecosystem. By coming in digitally, they will be able to gain an understanding of the market and then determine key areas that need brick-and-mortar stores in the future. Ocado and its other technologies, solid private brands, and partnerships give them some advantages in some markets in digital search, assortment depth, digital marketing, and quick fulfillment. At Groceryshop, Mr. McMullen said that they have an advantage in assortment with 25,000 items to be shipped quickly while some of the other retailers/delivery services only have 2,000 to 3,000. More than 75 percent of U.S. shoppers have done some type of e-commerce for grocery in the past year, but the penetration is actually higher among young and affluent shoppers. Retailers will need to continue to monitor… Read more »
Liza Amlani
BrainTrust

With Kroger’s national brand recognition and Ocado’s technology and go-to-market strategy, this is a great way for Kroger to enter into new territories without the expense of opening up a physical store. The pandemic proved that digital grocery works and consumers now expect to shop both online and offline. Kroger’s automated fulfillment and grocery delivery will give local physical and digital grocers a run for their money.

Warren Thayer
BrainTrust

I expect Kroger will find this adequately profitable, and a great way to enter new markets and scope out store locations that will work. People move around a lot, so the Kroger name is pretty well known everywhere. I’m a snowbird splitting time between New Hampshire and Florida. I figured out the Publix BOGO game quickly and it’s made me loyal. Kroger may need something akin to that to set them apart. Maybe soon, Wall Street securities analysts will finally figure out that Kroger is the real deal and stop trashing them every time someone sneezes.

Craig Sundstrom
Guest

This is where I really miss Tony O knocking some sense into our heads bringing the perspective of someone who actually runs a (grocery) store. I would call this interesting, and it may prove profitable, but those of us who think grocery will remain overwhelmingly store-based aren’t going to foresee this as ever grabbing a large market share. Even beyond the actual sales, a sizable number of stores provides crucial name recognition … no small matter when someone is sitting at the keyboard asking “who do I order from?” And last — but by no means least — everyone in Florida goes up against Publix, the ne plus ultra of markets.

Karen Wong
BrainTrust

I’m a big fan of the quality of service and the freshness guarantee provided by Ocado having tried them in my area. And traction slowed once initial launch campaigns ended. They’re most attractive if you have your weekly buy planned in advance. So, as you can expect, many use it to simply restock the pantry to repeat buy bulky products. Not high margin sales.

Online grocery is a super competitive market with everybody from mealkit companies to Amazon chomping at the bit. High volume, low margin. Size of basket and impulse buys matter. Price transparency online makes it even worse. This doesn’t even take into account the amount of data leveraged by a 3rd party even if you are able to “control” it.

Without stores, you don’t have the competitive moat of economies of scale and owning all of your core data. Instacart and DoorDash started as additional channels that are using industry wide data to compete in new ways now.

James Tenser
BrainTrust

Mr. McMullen tipped his hand about Kroger’s digital-first strategy in his keynote appearance at GroceryShop last month.

“The sheds are also a way into new markets,” McMullen said. “There is one third of the U.S. we are not yet in today. Our aspiration is to feed the whole nation one step at a time.”

I view this as a very deliberate, “tip-of-the-spear” strategy intended to gain a rapid foothold in attractive geographies while skimming the largest, most profitable baskets from incumbent omnichannel grocery operators.

If it succeeds, it could drive down the market value of existing competitors, lowering their acquisition costs.

Long game is to become the first nationwide omnichannel grocery business to “feed the whole nation.”

Richard J. George, Ph.D.
BrainTrust

Kroger is attempting to be grocery market equivalent of Amazon. The concept has some real potential, particularly in Florida where Publix has little competition. Not so certain it makes sense in other markets, where the major supermarkets have developed online systems. Remember multi or omnichannel is not about channels, it is about customers. Many customers like having a choice between online and bricks & mortar. This option appears to limit that choice.

Carlos Arambula
BrainTrust

The pandemic expedited consumer’s trial and adoption of grocery delivery. Most retailers, of any category, will have to implement a similar system to remain competitive. And when done properly, they will succeed.

The challenge will be to manufacturers, since it creates a problem for new brands or product innovation as most consumers will simply order brands and products they already know and trust.

wpDiscuz
Braintrust
"Not having stores may be efficient, but it will be interesting to see if they can drive an appropriate share of voice without physical locations."

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