Biggest deals of the year:
$247 million partnership with Ocado; $200 million to acquire Home Chef (plus $500 million in incentives)
Kroger looks to optimize its store assortment and e-commerce services while continuing to position itself for long-term growth.
With e-commerce accelerating, alternative formats growing in popularity and consumer tastes rapidly evolving, it’s a tough time to be a conventional retailer. But Kroger is determined to elevate itself above the fray and compete head-on with the likes of Amazon and Walmart.
To do this, the company needed an ambitious plan. And that’s just what it got with Project Restock, announced late last year.
"We will change the way people eat in the U.S."
Chairman and CEO, Kroger
"We will change the way people eat in the U.S.," said Rodney McMullen, Kroger's chairman and CEO, during the initiative's unveiling last year. "If you are eating, we want to serve you. Unless you are eating in a white tablecloth restaurant, we want to be able to provide that meal for you."
At the time, it was difficult to see how the country’s largest supermarket operator would go about achieving this lofty goal. But during the last year, in a flurry of announcements covering a wide range of investments, Kroger has steadily chipped away at this vision for the company that deftly balances new opportunities with legacy strengths.
Reaching more consumers in more places is the name of the game. On the online side of the business, Kroger has continued to build out its store pickup and delivery services. In addition, it’s built new services that can extend the appeal of its most popular products while also reaching shoppers that may not have a store nearby.
Kroger Ship, a direct-to-consumer service offering everything from pantry staples to cleaning products, launched in August. Just two weeks later, Kroger announced it intended to reach shoppers abroad with a site on Alibaba's Tmall centered on the grocer’s store brands, including its $2 billion jewel, Simple Truth.
Kroger also has pushed assertively into promising new categories. After spending months building its own meal kit offerings, the company acquired Home Chef in May, one of the strongest brands in a popular but challenged industry. Kroger recently kicked off its nationwide expansion of the pre-portioned meal by placing Home Chef kits in 350 of its stores.
"I think for brands to be relevant going forward, you need to be where the customer is, and you need to ensure you’re able to fulfill the need states they want to fulfill when they’re thinking about what’s for dinner," Rich Dinardis, Home Chef’s chief revenue officer, told Grocery Dive. "That's something Kroger understands very well."
With its launch of the fashion line Dip, Kroger showed it was willing to look beyond food to grow its bottom line. Spearheaded by Joe Mimran — the designer behind Loblaw’s popular Joe Fresh line — Dip touches on popular categories, including athleisure, kids’ wear and casual threads for men and women. The line’s fall collection, on sale at 300 Fred Meyer and Marketplace stores, includes $39 bomber jackets for women, $19 slim fit jeans for men and kids’ graphic tees starting at $5.
Kroger has forged some innovative partnerships along the road to Restock. It's teamed up with Walgreens in a pilot that will offer online order pickup at select Cincinnati-area pharmacy stores. During the summer, Kroger signed on with Nuro, the driverless technology company, on a delivery pilot in Arizona.
But the most transformative deal by far — the one that could put significant daylight between Kroger and its competitors in e-commerce — is with British e-grocer Ocado. As part of that partnership, Ocado will build 20 automated warehouses across the country filled with robots that will assemble orders faster and cheaper than the manual pick operations that currently dominate the industry.
A few key questions swirl around the Ocado deal. How will Kroger leverage the warehouses for store pickup as well as delivery? And will the deal generate enough incremental gains to overcome the significant upfront cost, estimated to be around $20 million per warehouse? Still, analysts applauded the transformative potential of the tie-up.
"Ocado is at the bleeding edge of using automated technology to fulfill orders and picking [products]. It's a great partnership, and I think it gives Kroger something they can move forward with with confidence."
Managing director, GlobalData Retail
"Ocado is at the bleeding edge of using automated technology to fulfill orders and picking [products]," Neil Saunders, managing director with GlobalData Retail, told Grocery Dive. "It's a great partnership, and I think it gives Kroger something they can move forward with with confidence."
Leveraging technology remains a key focus for the Restock initiative. In addition to e-commerce innovations, Kroger is rolling out digital shelves that interact with shoppers’ smartphones to 200 stores by the end of this year. It's also licensing its store technology to other retailers. At the same time, the grocer remains focused on optimizing its shelf space for maximum sales velocity.
Kroger's most recent earnings report left much to be desired in the eyes of analysts and investors, with net sales and comparable store sales coming in below estimates. But the company maintains it’s focused on more distant horizons as it looks to redefine what an American supermarket company can be.
"I think they are still playing the long game," Neil Stern, senior partner with McMillanDoolittle, told Grocery Dive. "Short term, they are facing significant margin pressures. Long term, they are trying to position themselves to face Walmart and Amazon."