The Kroger Co.'s recently hatched partnership with British e-commerce company Ocado will provide flexibility for the retailer to adjust how it fulfills online shopping orders depending upon consumer demand, company officials said in a conference call discussing quarterly earnings.
Kroger earlier this year announced an exclusive U.S. partnership with Ocado, which will build large, automated warehouse facilities for the Cincinnati-based chain similar to the ones it operates in the U.K.
CEO Rodney McMullen said officials were already at work identifying the first three sites for such facilities in the U.S., although a timetable for their arrival remains undetermined. “We’re going to open those facilities as fast as we can,” McMullen said. “Obviously, there is a certain amount of time it takes to construct them and for Ocado to build it out. There’s plenty of pressure on Ocado and us and get it open as quick as we can.”
McMullen said he anticipates that the facilities would eventually take pressure off Kroger stores currently assembling and distributing orders for pickup and delivery -- and do so more cost-effectively. Although he said customer experience has not yet been adversely affected by employees assembling orders on the store floor, the chain experienced 66% online sales growth in the period. If that trajectory continues as expected, Ocado will be there to take those pressures off.
“What we're really trying to do is make sure we have an overall infrastructure for digital that can support whether it's 5% of share or 30% of share,” he said. “If it ends up being 30% of share in digitral grocery, there will be more [distribution] sheds and they’ll be used to take pressure off the stores, so the stores become more of a distribution point. What we’re trying to design is flexibility of a system that can scale based on how the customer changes.”
In the meantime, officials highlighted the rapid expansion of ClickList internet shopping and delivery options through Instacart, allowing Kroger to extend what it called “seamless shopping” to about 75% of its customers. “Our goal is to reach 100% of our customers with the seamless experience – and, over time, to reach all across America,” McMullen said, indicating the Ocado option could help stretch Kroger’s reach to grocery shoppers beyond parts of the country to where it doesn’t currently operate stores.
The recently announced merger with meal-kit company Home Chef will also drive Kroger’s digital business, while the company will take over the prepared meal kits in stores, McMullen said. “Customers want convenience, simplicity and a personalized food experience. Our planned merger with Home Chef will accelerate our ability to deliver exactly this,” he said. “There is a lot we admire about Home Chef – their creativity and entrepreneurial energy, and their use of data to connect with customers, to name just a few.”
As previously reported, Kroger detailed a better-than-expected earnings performance in the first quarter, driven by cost savings including improvements in areas such as shrink, and rebounding same-store sales. CFO Mike Schlotman cautioned investors, however, to expect a choppy earnings performance for the fiscal year as initiatives and investments associated with its ongoing Restock initiative roll through. For example, the “space optimization” process changing merchandise layouts currently underway in multiple stores will be a near-term headwind but could have a positive effect on sales by late in the third quarter, Schlotman said.
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