"From grocery company to growth company" - how Kroger pitches its omni-channel transformation objectives

With Walmart reported to be looking at a big e-commerce hit, but still tapping online groceries as a future growth driver, it’s worth remembering that this is a retail sector in the US that’s still in its early stages - and there are other competitors than just Amazon or Walmart.

Of course, Amazon is the gorilla in the market in dollar terms. According to recent data from Edge by Ascential, Amazon’s 2018 online groceries revenues came in at $8.2 billion, well ahead of second-placed Walmart on $2.84 billion. There are other factors to be built in here in terms of future prospects, not the least of which being Walmart’s physical proximity to 90% of US consumers.

It’s interesting to note growth rates in this space. Amazon is up 12.5% year-on-year, again beating Walmart on 10%. But look to third-placed - in dollar terms - Kroger and its 2018 online grocery revenues of $1.51 billion are up a massive 66% year-on-year. That’s an upward trajectory that leads CEO Rodney McMullen to boast:

Our efforts are positioning Kroger to be the leading omni-channel retailer in the food industry. Since 2014, we've gone from no digital sales dollars to a 2018 annual run rate of about $1.5 billion, which will trend toward a $9 billion digital sales run rate in the future…while we are only in the middle of our transformation, it's important to frame up the magnitude of the progress that we have made.

Kroger is the US’s largest pure-play supermarket chain with 2,764 stores around the country, 1581 of which now offer online grocery ordering and pick-up. An alliance with Instacart adds another 1600 stores to that total. The chain also reckons to be able to offer home delivery to 91% of US households via its own online service, Kroger Ship. By the end of 2019, the firm claims that “everyone in America” will be able to shop with Kroger, offline or online

There have also been some savvy tech investments, such as last year’s signing of a partnership with AI firm Nuro built around self-driving car delivery. That one might still be on the bleeding edge, but is now delivering to customers in Scottsdale and Houston and is pitched by McMullen as “an entirely new platform for local e-commerce in solving the last mile”.

On a more short term ROI basis, Kroger has also taken a 5% stake on UK online grocery champion Ocado to build up to 24 robo-driven fulfillment centers around the US. Work on the first of these is now underway. McMullen explains:

Two weeks ago, we broke ground on America's first high-tech customer fulfillment center powered by Ocado…in the Cincinnati region. The innovative facility brings first-of-its-kind technology to the United States and creates over 400 new jobs in our home state. We are excited to build nearly two dozen customer fulfillment centers across America. We recently identified additional sites in Central Florida and the Mid-Atlantic region.

Transition

The party line from McMullen is that Kroger is a company in transition, from physical to omni-channel retailer but also, more colorfully “from a grocery company to a growth company”. He argues:

All of this work starts with our customer obsession focus. That is why we're building an omni-channel platform to serve customers with anything, anytime, anywhere. That is why we're focused on redefining the experience grocery customers can expect to have in our stores and online, improved upon by exciting partnerships that create additional value.

Customer obsession is also why we're building a platform to serve customers anything they want, anytime they want, and anywhere they want. Our customers don't distinguish between an in-store and online experience. Rather, they typically have a food-related need or a problem to solve and want the easiest, most seamless solution.

He also talks of “creating a virtuous cycle built upon the rich collection of proprietary data generated from our customer traffic” to improve the customer experience, arguing that this is something that will show its benefits over time:

It really is for us to step up our game. And if you look at the customer experience, we've made significant improvement in some of the basic customer experience. What we find is there's a lag between when you make those improvements and when the customer starts rewarding you with their checkbook. This is using the data that we track every week - how are we doing in terms of the friendliness of our associates, in-stock, and all of those pieces?

My take

The Kroger transformation story is an omni-channel retail story that gets overshadowed by the Amazons and Walmarts of the world, but is a story of digital best practice in an emerging business sector.

There have been some smart technology bets taken. A case in point is digital coupon firm YouTech which Kroger acquired for “a nominal value” in 2014, invested in and recently sold off for $565 million to commerce firm Inmar. Kroger will continue to use the platform via a long term partnership deal.

Partnering is something that Kroger is proving to be adept at in order to accelerate its omni-channel re-invention, with McMullen citing alliances with Home Chef, Walgreens and Microsoft alongside the highest profile example in Ocado:

All of these partners accelerate our ability to provide customers anything, anytime, anywhere. Each partner shares our passion for exploring the nexus between technology and innovative customer experiences.

And the physical stores have not been forgotten amidst all the digital spin. McMullen recognises their role:

If you look at our digital business, a lot of our engagement in our digital business starts in our stores and it's those convenient pickup points for our customers to pick up their groceries. So please don't take our conversation on online and digital [to mean] that we think the physical stores are any less important. They are not.

It’s still Amazon way out in front in terms of the US online grocery business, but there’s no reason to assume that Kroger can’t close the gap with Walmart - or even overtake in the domestic market - if it continues to execute on its current strategy.

Getting those Ocado centers open and up-and-running will be a crucial factor. As noted last week, one of the issues that Walmart has is too few fulfilment centers and that’s where we’re likely to see a lot of online investment going in the near future. If Kroger can tap into Ocado’s skills here, that could become a major differentiator in the battle for second place.