A seamless experience that requires zero compromise by customers.
That’s the well-established mission statement for grocery Goliath Kroger, as articulated by CEO Rodney McMullen. As noted previously - and in common with most companies in this part of the retail sector - Kroger saw a massive uptick in online consumer activity during the COVID pandemic, with its own digital transformation initiatives accelerating accordingly.
Today, again like most of its contemporaries, Kroger is now looking out at what shape the grocery business takes in the Vaccine Economy as shoppers return to stores, but the online demand is unlikely to go away. How to strike the most effective omni-channel balance is the top corporate priority.
For Kroger, a key element in its strategy will see continued investment in technology. As McMullen noted at the firm’s 2022 Business Update event last week, this is seen as critical:
We cannot accomplish what we're trying to accomplish for our customers, for our associates, for our communities, and then for our shareholders, without technology being an integral part of everything we do. And technology is really driven by the needs of the business, the needs of the customer, the needs of our associate. We've deliberately invested capital and expense in technology and innovation.
Today, technology is just integrated in everything. One of my favorite quotes is, 'If you know you're using technology, then it's not good enough'. So everything that we're trying to do is to make sure we're using our data, our technology, to enhance the customer experience, to enhance our supply chain to enhance our business operations and productivity and most important of all to make the lives of our associates easier.
So, no pressure then on Yael Cosset, Kroger’s Chief Information Officer and Chief Digital Officer! For his part, Cosset has a clear vision of the omni-channel needs of the business moving forward, in order to deliver the seamless experience that his boss evangelizes:
Some retailers have chosen to rely exclusively on stores, while others have favoured dedicated facilities. We're building an ecosystem by combining the best of both worlds without compromising on the customer experience. And our technology and our data ties it all together to make it seamless to our customers.
We know customers want options and solutions without having to compromise. Depending on the ‘trip missions’, customers will have different expectations - what they want, from the freshest produce to a simple yet high quality, fresh meal solution; when they need it; whether they're doing their planned weekly shop or looking for an immediate solution for dinner 30 minutes from now; how they want to get it, go to a store, use pick-up, get a delivery. All this has to come together without asking the customer to compromise on the value they get.
While customers will turn to retailers with the most relevant solutions, fulfilling all of their trade missions, retailers continue to ask customers to compromise on the experience, limiting the options or the value they get, which in turn impacts the retailer's overall growth potential. Or they compromise on the economic model which is not sustainable long term.
This is where the two models of operating have come from, he explains:
The first model relies almost exclusively on stores. Stores being an existing asset are a great option. They offer choice of assortment, including hot food meal solutions. They offer options on timing, including the quick trip leveraging the customer proximity. They also provide options on how customers choose to engage - come to a store to pick-up at a relevant time or get a delivery. However, with a store-only model, there is a tipping point where one would compromise on potential share growth due to capacity limitation or the unique economic headwind compared to dedicated facilities.
The second model focuses on large dedicated facilities and their leverage points. They provide great flexibility in assortment, sometimes potentially beyond what you can find in a store, that delivers great customer experience with reliable feel rate which can be challenging in a store. They provide great scale efficiency and allow us to reach new customers. And by leveraging technology, Artificial Intelligence, robotics and automation, they can deliver great unit economics, which in turn allows us to pass value back to our customers and our shareholders. However, by being further away from the customer, it can compromise the ability to capture some of the customer traits such as convenience, which has a higher expectation in terms of immediacy.
What's needed is the best of both worlds:
Neither approach on a standalone basis can give us full growth potential or the unit economic leverage. On one hand, the store offering a lot of options to the customer, taking advantage of its proximity, but limited scale; on the other hand, large facilities offering reliability scale and efficiency, but limiting some of the trips we can capture.
This is exactly why we have structured our ecosystem to leverage both, forming a dynamic network with our stores, our automated Customer Fulfilment Centers [in partnership with Ocado] to capture the full growth potential with the most relevant experience for our customers. This approach allows us to capture more trips, from the planned weekly shop to the unexpected and time sensitive dinner; more customers; more occasions, in existing and new geographies; zero compromise for our customers capturing the full growth potential and no compromise for our shareholder, delivering a sustainable economic model.
The Ocado relationship is a major plank in realizing this vision. Last week Kroger announced that it will add CFC facilities in Austin and San Antonio, Texas, and Birmingham, Alabama, a continuation of Kroger’s entry into Florida in 2021 without physical stores. The Texas and Alabama facilities will serve new geographies for the organization through e-commerce.
For his part, McMullen observes of the Ocado alliance that it was a bet on the future:
When we decided to do the original agreement, the thing that I shared with Tim [Steiner, Ocado co-founder] is, 'We're partnering with the Ocado who we think you will become, not who you are'. Ocado has an amazing set of software engineers and talent that's continuing to improve and develop on the things they have…Together we can create something that we can't individually. The other thing I always like to remind people is to remember Ocado has been in the business for 21 years and we get 21 years worth of experience with that partnership.
Cosset meanwhile is looking to that future, pointing to January’s Re-inventing Retail presentation by Ocado as the shape of things to come:
Two simple examples. The new generation bot, which is five times lighter than previous version, will reduce the cost and the time to build a facility, provide more flexibility and push the envelope on how we integrate automation in smaller facilities, such as the one we announced in South Florida. Robotic picking [is] increasing the speed at which we take an order and improving the unit economics by reducing labour cost. All these will contribute to further improve the unit economics, the flexibility and size of facilities, which is crucial to our model to fully capture the growth potential by capturing more trips and reaching new customers.
Meanwhile the accelerated digital learnings from the COVID crisis will be retained, he argues, pointing to Same Day Delivery as an exemplar:
This new offering was profitable on day one after the first order - and that's at a time where many [retailers] are struggling with a Quick Commerce model. We expanded our loyalty and personalization platform, which enables us to provide value that matters to each customer, with over 2 trillion relevant recommendations to our customers [and] with 50% of items added to basket as a result of personalized search. Our omni-channel customers are the most exposed to our personalization and are showing 98% retention and spend two-to-four times what an average customer spends.
Looking ahead, Kroger want to grow its existing business by roughly $5 billion over the next couple years and such digitally-enabled initiatives are at the forefront of this ambition. Cosset says:
Personalization simplifies the experience, improves relevance and convenience, which underpins how we grow share of wallet and improve the overall mix with our customers [and] which we will continue to amplify with the Boost paid membership program. Second, we are making it easier for customers. In 2022, we will continue to make it convenient for our customers to shop when and how it best suits them. We expect pick-up, our largest e commerce business today, to grow by double digits in 2022 alone, taking advantage of the store proximity, expanded capacity and availability when it really matters to the customer.
Last but not least, new trips and new customers. We will continue to leverage our stores for immediacy with Kroger Delivery Now to grow our share of the convenience trips. These occasions with our customers are highly incremental to our core business. Quick Commerce alone is a billion-plus growth opportunity for us over the next few years.
The most important learning from the past two years as the pandemic impacted customer behavior is that by having a seamless experience available online and in store, Kroger can retain the customer, he concludes:
Our retention rate is over 98%. In fact, when customers have decided to move from primarily online back to a little bit or a lot in store, depending on their personal preferences and and also the context of their day, every single day we retain over 99.9% of the customer spend, even when they slow down their engagement online.
Kroger has executed well in a time of retail and societal crisis. McMullen’s point about betting on the future of Ocado and the business model that that firm’s tech enables is well-made. As the Vaccine Economy takes shape, the question of which learnings and advances from the pandemic stick with us remains to be seen, but Kroger looks well placed to benefit from an omni-channel market.