Pardon the Disruption is a column that looks at the forces shaping food retail.
When Kroger announced its tie-up with Ocado back in 2018, the boldness of the venture was quickly tempered by a healthy dose of skepticism. How could the nation’s largest supermarket chain justify building massive, multimillion-dollar robotic fulfillment sheds to serve an opportunity that was still in its infancy in the U.S.?
The pandemic’s e-commerce mania has made Kroger’s investment look increasingly savvy. And that outlook looks even rosier following its expansion announcement Tuesday, when the company publicly committed to building five additional sheds, bringing its total to 16.
The news wasn’t so much in the number of facilities it said it would build as it was in the range of sizes and deployments. There will be small and medium facilities, a shed built to invade another new market, and a micro-fulfillment site in South Florida that will quickly fulfill a curated range of fast-moving goods.
The announcement gave the industry its first real look at the flexibility Kroger executives have long touted for its arrangement with the British technology company. It’s a multipronged approach that doesn’t simply rely on the lumbering facilities and next-day delivery that have been Ocado’s calling card up to this point, but that also incorporates smaller facilities, speedier service and interconnectedness across the network.
Kroger appears to be the first among Ocado's retailer service partners to announce a rollout of Ocado’s Zoom micro-fulfillment service, which launched in 2019 and is currently available in several West London markets. The automated facility, along with another smaller-sized shed, will serve a limited number of SKUs in as fast as 30 minutes, a nod to the growing focus on speedy, needs-driven delivery, particularly among younger consumers.
Seeing “Kroger” and “micro-fulfillment” together in the same announcement immediately piqued our interest at Grocery Dive — so much so that we chose to focus our coverage Tuesday on the Florida buildouts ahead of the also-significant news that Kroger is pushing into the Northeast for the first time with a customer fulfillment center (CFC). But before we, and others in the industry, begin imagining a vast network of Kroger/Ocado MFCs across the country, it’s helpful to bring up the companies’ previous comments about the technology this spring.
"When you look at micro-fulfillment centers, we would expect it not to be at quite the same level of profitability [as CFCs], because you have a lot of incremental work in terms of merging orders between store, and the facility itself," Kroger Chairman and CEO Rodney McMullen said during an April press call.
"[MFCs] are more expensive to operate than large sites," Ocado CEO Tim Steiner said on the same call.
The executives stressed the importance of the entire fulfillment network, and it appears Kroger is planning to deploy MFCs as a supplementary service solution rather than a core component of the fulfillment network. And that may be the best way to go, considering the trouble retailers are having integrating systems so far.
The CFCs are still the anchor of Kroger’s strategy. But they’re rolling out in a range of sizes and supplemented by smaller facilities that provide additional speed and service options. Kroger’s Groveland, Florida, CFC is a 375,000-square-foot behemoth, while the facility that plans to open next summer in Romulus, Michigan, is a more modest 135,000 square feet. There are smaller “spoke” facilities in Florida that help distribute goods, while the planned MFC and another small facility will get replenished by the Groveland facility as they offer faster fulfillment.
This flexible approach highlights the diverse and growing demands for online grocery convenience. Although the industry often frames e-grocery service as a choice between pickup and delivery, in reality there’s a broad range of options reflecting varying price points and fulfillment speeds shaping up across both channels. Some consumers want speedy 30-minute delivery while others are perfectly willing to wait 24 hours and pay low or no fees for a large pickup order.
There are other options in between, spanning same-day and next-day service, home delivery and click-and-collect, at the store and away from stores, and retailers are under pressure to cater to as many of those demands as they can.
Tackling the Northeast and cost realities
Kroger’s plan to open a CFC in the Northeast and launch its Kroger Delivery service was largely expected, but perhaps not this early. It indicates its service launch this summer in Florida, another market where it doesn’t operate any stores, has gone better than expected. In its release, Kroger noted, “The operation has ramped up faster than expected, unlocking additional ways of executing and operating and resulting in high customer repeat rates and net promoter scores.”
It also indicates Kroger is itching to jump into the Northeast market before its main competitors in the region, Albertsons and Ahold Delhaize, can fortify any competitive advantages. Ahold Delhaize is busy refreshing its Stop & Shop stores, and the banner doesn’t yet have a vertically integrated delivery service like its Giant Delivers and Giant Direct brands in the Mid-Atlantic. The Dutch conglomerate is also adjusting operations and shuffling its executive deck at FreshDirect, the online grocer it acquired last year.
Albertsons, meanwhile, operates largely undifferentiated e-commerce service through its Acme, Shaw's and Star Market banners as it figures out where to own and where to outsource operations.
By the time Kroger and Ocado have built their northeastern shed — the companies haven’t yet said where the facility will go, how big it will be or when it will open — these competitors will likely have made significant advancements in their services. Assuming Kroger opens a large-scale shed, that could be two years or more from now. But the company’s approach is targeting low fees and price points that are compelling to shoppers, and that competitors not named Walmart or Amazon may struggle to match.
The ability to outduel regional banners on service and price may become an ace card for Kroger. That appears to be the case in the early innings against Publix, the Florida juggernaut that has top-notch store experience but relies heavily on Instacart for delivery service.
“Similar to [Florida], the Northeast is a market where [Kroger] can be especially disruptive with very competitive price points, resulting in opportunities for share gains vs. regional banners such as Acme (ACI), and Stop & Shop (Ahold Delhaize),” wrote Barclays analyst Karen Short in a note to investors on Tuesday.
Kroger’s assertive moves into new and existing markets, paired with its flexible approach, seems to be the right approach at the moment, Short pointed out. However, the cost of the operation — the concern that industry watchers have had with the tie-up all along — remains an issue, she wrote: “We continue to be concerned about [Kroger’s] relative competitiveness given the high [capital expenditure] + fee structure [Kroger] has committed to with the Ocado solution vs. increasingly competitive fee structures/lower capex options emerging.”
Although the reliance on large, dedicated fulfillment centers seems to be meeting the moment in online grocery, other retailers like Hy-Vee are opting to rely on their stores and small satellite facilities — both automated and nonautomated — to meet demand in a less capital-intensive fashion. Walmart and Albertsons are betting on automated micro-fulfillment to meet growing demand at the local level.
This underscores the fact that, while Kroger and Ocado are off to a good start, they still have a long way to go to prove out their partnership.