A tale of two grocery stores Part 2 - how COVID has accelerated Kroger's omni-channel retail reality

Profile picture for user slauchlan By Stuart Lauchlan September 14, 2020
Summary:
COVID has brought fresh impetus to Kroger's existing omni-channel retail thinking, says CEO Rodney McMullen.

Kroger stores

We wish they would have opened a year ago.

That’s the heartfelt sentiment of Rodney McMullen, CEO of the US’s largest supermarket chain by revenue, Kroger, as he contemplates the opening of the firm’s first fulfllment center operated by partner Ocado. In common with the likes of Tesco in the UK, Kroger has been on the frontline of the COVID crisis, supplying as it does essential goods and services to keep the nation afloat.

Unlike Tesco or other European providers, US supermarkets have not been as advanced in their omni-channel strategies and the pandemic has forced an acceleration of effort. That said, as diginomica noted last year, Kroger has had a clear roadmap for transformation and had been delivering on that prior to the pandemic. McMullen says: 

Even before the pandemic our digital business had become a tailwind. The pandemic certainly has accelerated customer preference for seamless offerings. Our customers are increasingly turning to our e-commerce solutions for their grocery and household essential needs. Many of our customers are ordering groceries online for the first time as a result of COVID-19 and the majority of them tell us they plan to continue to do so in the future.

Kroger began investing in digital several years ago to build a seamless ecosystem that would deliver anything, anytime, anywhere. As a result, we have over 2,100 pick-up locations and 2,400 delivery locations reaching 98% of our customers with a seamless customer experience that combines the best of our physical stores with digital. Kroger was the first to integrate pick-up and delivery into one seamless experience. These investments were, especially, timely as customer adoption of pick-up and delivery has grown significantly during the pandemic.

Kroger’s digital ecosystem continues to expand and customers are increasingly engaging with us. For example, Home Chef is growing incredibly fast no doubt accelerated by the food at home trend that we believe is a structural change. We also announced that Kroger Ship will expand to offer an extended ship-to-home assortment through a marketplace offering of third-party sellers. We will continue to expand our ecosystem over time.

The Ocado factor

That’s reflected in consumer behavior, with digital sales up 127% year-on-year, growth that McMullen expects to see continue as the firm’s partnership with online grocery platform provider Ocado starts to show results:

While COVID-19 has not necessarily changed how we think about our approach to e-commerce, it has accelerated our thinking about how our full evolution of seamless strategy, inclusive of Ocado. Ocado is a strategic partner of choice delivering innovation and best-in-class experience and economic advantage through efficient fulfilment. We are confident the future of our ecosystem will incorporate a mix of capabilities and facilities ranging in sizes and our network will flex as demand matures and the optionality will allow us to fulfill same day or next day delivery or pick-up and customers or store replenishment. 

Key to all this are Ocado’s celebrated automated fulfilment centers. McMullen says: 

Ocado's model incorporates state-of-the-art automation and AI to expand Kroger's products to a larger footprint, and our model to deliver to customers is significantly less costly than our existing model. We are on track to open the first two sites in the spring of 2021. If you look at obviously, the first initial part of the two first sheds that we'll open in Monroe, Ohio and in Florida, we'll be just scaling it and the assortment that customers have a desire for in that offering versus some other offerings. Those are two key parts…We’re using the learnings from Ocado in terms of what they have in the UK obviously, in Canada and France. And it will be taking all of those learnings and then making sure we manage the cost of the start-up as well. So we're excited. We can't wait and we wish they would have opened a year ago.

If they had been in place then, it might have helped Kroger in its efforts to manage a phenomenal uptick in demand for online ordering and delivery or pick-up which was driven by the outbreak of COVID-19. McMullen explains:

In terms of capacity, we're constantly adjusting the capacity during the day because as people get used to the new normal. The times they want pick-up slots constantly change. It's one area where I've been super proud of our teams both stores and our data and technology and operations team in that constant adjusting and incrementally hiring people. There are stores now where we're aggressively investing a little bit of capital to be able to expand what's available within that store and when we do that that will allow us to add slots as well…I think the teams have done a great job of continuing to expand.

Pick-up preference

For the moment, pick-up is still the predominant preference for consumers, he adds: 

Customers still tell us the reason they like our pick-up experience is really the freshness of our products and the quality of that and the assortment that we offer. So it probably helps, but I think it's more driven by the experience in the fresh side than waiving the fee. If you look at mix between pick-up and delivery, it's still predominantly pick-up. And we find, customers find pick-up incredibly flexible on their schedule, much more so than delivery. And that's the reason why they continue to like pick-up, in a good way. If you look at basket size, basket size would be significantly bigger on pick-up versus in-store.

As for new customers, the crisis has driven fresh faces to Kroger both physically and online, although the distinction between the two channels is becoming increasingly blurred, says McMullen, partly down to the way the firm engages with them:

In the past, a new customer would have to earn their right to start getting loyal customer mailings and digital offers and things like that. During this, we've started treating customers as loyal shoppers immediately, rather than waiting for them to engage with us for a period of time. And what we're finding is we're having success on retaining those customers and repeat purchases as well.

And looking beyond COVID, McMullen predicts that certain changes are here to stay:

Our data insights show customers are rediscovering their passion for cooking at home and have an aspiration to eat more healthy foods as a result of COVID. When we talk to our customers they tell us they plan to continue to prepare and eat more meals at home. As children return to school many families are telling us they plan to make breakfast in the morning and prepare lunch for their children to take school. As we talk to other companies across America, we believe return to work will look very different with many employees working part of the week from home. And finally, while the full economic impact of COVID-19 is yet understood, our data shows that during the periods of lower economic activity, we see a structural shift from food consumed away from home to food consumed at home. All of these factors combined lead us to believe there will be more meals eaten at home or prepared at home for the foreseeable future.

All of which means that Kroger’s omni-channel transformation strategy will be put to the test, he concludes: 

What we're expecting of ourselves is we will get to the point where we're indifferent if a customer connects with us digitally or a physical store.

My take

Like Walmart, Kroger has had a good crisis. As we noted back in June, it’s gone so far as to open up its playbook for others to emulate. Also like Walmart, while it has proven its omni-credentials, it still needs to show how it can make its digital business profitable. I’d hazard a guess that it’s better placed to do that, with its Ocado partnership, than the larger rival is.