Kroger puts Ocado e-commerce expansion on hold in search of "a clear path" from its investment so far

It’s fair to say that online grocery technology platform provider Ocado has had a rough time of it of late. Back in March its ongoing bottom line problems reached a new high when it turned in a £0.5 billion full year loss, its largest to date, on revenues that were essentially flat year-on-year at £2.5 billion.

But while investors are all, unfortunately, used to the firm’s red ink on the balance sheet, a second problem was exposed in July as it was revealed that the relationship with the provider’s retail e-commerce partner Marks & Spencer has become increasingly tense, with both sides admitting that it’s not where either would want it to be.

At the time Ocado CEO Tim Steiner pointed analyst attention towards a US success story in the shape of Kroger, stating:

We're addressing other additional opportunities and Kroger now. We’re supporting Kroger in working out and working on how they can successfully apply those learnings across the other live sites and how they can make sure that those learnings are taken into account in the sites that aren't yet live.

The message to the market was clear - things might be a bit rocky in the UK with M&S, but across the Pond, things are going well of Kroger.

Except…the relationship with Kroger has also run into some bumps in the road as the US firm puts the development of new Ocado automated Customer Fulfilment Centers (CFCs) on hold until such time as it is confident that ones that have already been opened are meeting expectations.

Kroger and Ocado opened the first US CFC in Ohio back in 2021, followed by seven others, the latest going live as recently as June this year in Maryland. When the two firms announced their relationship back in 2018, the intention was to build out a national fleet of centers, but that now seems to be put on hold for the time being.

According to Kroger CEO Rodney McMullen:

Right now, all the energy is focused on the ones we have and making sure that those are where we want them to be, where they need to be and on a sustainable basis…I would say that a ton of work is being done. We're making progress, but we wouldn't be [at] the point where we would start focusing on additional sheds until we make sure that we have a clear path on the ones we have. 

Digital 

None of this diminishes Kroger’s enthusiasm for digital, insists McMullen, which grew 12% year-on-year in the firm’s most recent quarter:

Our digital team's relentless pursuit of improving the customers' experience is driving our success.

We scaled our hands-free technology across the company to improve speed and expanded pickup options with automated pods and lockers, improving productivity and providing customers with more flexibility.

Data-enabled personalization also remains a key priority, he adds:

Personalization enables us to meet our customers' unique needs and deliver value beyond the product shelf price. Our best-in-class data science work powered by our loyalty data is driving strong digital engagement. So far this year, customers have clipped more than 2 billion digital offers. To me, that's just an amazing number when you think about 2 billion. We've also increased our digitally engaged households by 1.2 million compared to last year. This growth is important to our model as digitally engaged households are more loyal, spend nearly three times more with us and help grow our alternative profit businesses, like Kroger Precision Marketing.

My take

We are making meaningful progress, but we still have a lot of work to do.

McMullen’s decision to want proof of value for money is a pragmatic one given the ongoing difficult macro-economic climate in which Kroger is operating:

Budget-conscious households are facing external spending pressures.These customers are buying smaller pack sizes and, at times, prioritizing the lowest shelf price. These customers are building smaller baskets and switching to lower-priced items to stretch their budgets…We expect these broader economic headwinds to continue pressuring customer spending in the second half of the year.

He’s also got the small matter of trying get a proposed merger with Albertsons across the regulatory finish line. The most recent development here has been the signing of a deal with C&S Wholesale Grocers for the sale of 413 stores as part of a divestiture plan that’s a key commitment in the proposed merger agreement:

A critical component of that plan was to identify a well-qualified buyer who would be able to operate as a fierce competitor…C&S service offerings include a full suite of retail service offerings, very similar to what Kroger provides in house, including merchandising, e-commerce, accounting and store design for example.

So, there’s progress being made - but the Federal Trade Commission (FTC) still has to sign off on the whole thing.

All that said, putting further Ocado activity on the back burner clearly makes sense for Kroger. For Ocado on the other hand...