Will Kroger Eat Itself?

Analysts react with caution as e-com ambitions could deleverage stores
Kroger storefront

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As we reported last week, officials of The Kroger Co. presented a new strategy to investors that was heavy on data and big on e-commerce, including details on its long-awaited partnership with Ocado that is just now getting off the ground.

The gradual opening and ramp-up of at least 11 “sheds"—customer fulfillment centers powered by AI and robotics designed to provide grocery home delivery with superior economics than orders picked from stores or run through smaller local fulfillment facilities—underpins the grocer’s ambition to double its e-commerce sales from $10 billion today to $20 billion by the end of 2023.

Naturally, the sunny outlook drew some clouds of skepticism. Barclays’ Karen Short, for example, had some trouble reconciling the big Ocado boost with the 2% to 4% range of comparable sales increases also shared as part of the Cincinnati grocer’s long-term growth algorithm. Assuming that 3% store comp in 2022 and 2023 grows sales by $2 billion overall, and e-commerce in the meantime grows by $10 billion, that’s $8 billion in sales that that’s not necessarily new to Kroger but simply shifted from stores to virtual. That, Short argues, could trigger issues running stores profitably.

“While we appreciate the fact that we are in an omni-channel world,” Short wrote in a message to clients last week, “the four-wall cannibalization will lead to deleverage on a four-wall basis."

To an extent, the prospect of grocers deleveraging themselves as e-commerce grows is unavoidable, and on balance, a relatively good problem to have, says PJ Stafford, VP of sales and marketing for FoodX Technologies, when I asked him about Short’s conclusions.

“It would be ideal if all new online grocery sales were accretive—that is, the increase captured new revenue from consumers who moved over from a competitor, perhaps who didn’t offer an online option or as robust an online experience, or charged higher pickup or delivery fees or increased the price of each online basket item as a hidden service fee,” Stafford said. “But in the real world, some of that increase in online sales are your current customers choosing to utilize the convenience of click and collect or home delivery.”

Kroger’s implied ambitions in e-commerce, in the meantime, would have it capturing an impressive 16% of Barclays’ estimates online food sales estimate, and that would be nearly impossible effectively to pull off were stores to serve that volume alone, Stafford added, noting higher costs, lower fill rates and worse conditions for self-service customers.

Some of the ravages of e-commerce orders fulfilled through stores are evidently playing out now at Walmart, as my colleague Christine LaFave Grace reported last week. That’s why these alternative fulfillment methods—Walmart is another dedicated adherent to them—are being planned in the first place.

And ultimately it’s a reminder that this digital transition won’t necessarily all be pretty—even if pieces of it are dazzling—in part because customer expectations have also increased in recent years as customer-centric grocers are seemingly promising them the world.

Bill Kirk of MKM Partners lauded Kroger for the “beautiful simplicity” of its new fresh and digital strategy—but said the preceding Restock program fell somewhat short on its goal to sufficiently improve customer experience in-stores which “still do not excite,” he said. Citing an analysis of customer reviews on the Yelp app since 2018, Kroger’s average score has fallen by 0.21 stars compared to an average drop of 0.18 stars for food retailers overall.

“For Kroger, like many food retailers,” he said, “satisfying customers has become increasingly hard.”


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