From the prospect of virtually expanding to a national footprint to the question of whether sufficient customer appetite to support its considerable investment ever develops, much is riding on the success of The Kroger Co.’s ambitions to evolve its online grocery business behind an exclusive U.S. partnership with the technology firm Ocado.
Nearly three years in the making, the first two of as many as 20 multimillion-dollar fulfillment centers are set to open early next year in a move that will transform Kroger’s current e-commerce offering, which today is largely operated manually in its stores, to one also enabled by central warehouses powered by advanced robotics and artificial intelligence. The goal is to turn the money-losing proposition of shopping and delivering for customers into a profitable means of gaining share against the likes of giants such as Walmart and Amazon.
Will the biggest bet in U.S. food retail pay off? Luke Jensen is confident it will.
“The challenge of online grocery is not specific to Kroger,” Jensen, the CEO of Ocado Solutions, told WGB in an exclusive interview this month. “The challenge is that when you do the sums, you realize that it’s either impossible to make money doing it, or extremely, extremely difficult to do anything more than break even. This is a problem that every grocer has around the world.”
Though the Kroger-Ocado partnership has encountered plenty of skepticism—investors worry about the costs of implementation, some industry observers note Kroger has little experience conquering new geographies, and others have questioned the wisdom of distant warehouses to serve the last mile in a spread-out country—most grocers, including Kroger, since the pandemic arrived this spring have seen e-commerce volumes soar to the point at which fulfilling from stores alone is no longer adequate and are being forced to think bigger. This further validates the company’s vision to invest with Ocado, Jensen said.
“Kroger took a very strategic view, which was to say, imagine a world in which online may end up being 20% of the market, or 30% of the market,” Jensen said. “You’re going to have to have a solution that delivers economically against that scale of business. You can’t think of this incrementally. You need to think of this radically.”
Ocado Solutions is the arm of the British e-grocer Ocado that licenses its software and robotic solutions, known as the Ocado Smart Platform, to worldwide grocers. Kroger and Ocado announced an exclusive U.S. agreement in 2018. The deal calls for the companies to build up to 20 U.S. fulfillment centers. Kroger, which invested in Ocado as part of the deal, is to pay monthly fees for Ocado’s service.
Degrees of Flexibility
Jensen is a former retail strategy consultant and executive of the U.K. grocer Sainsbury’s who joined Ocado in 2017 as it moved to license the software and solutions behind its groundbreaking U.K. retail business to grocers worldwide. In an interview, he leaves it to Kroger to reveal details about the forthcoming service—a brand name, for example—but is happy to extoll the virtues of an underpinning he describes as the most sustainable solution to orchestrating e-commerce for grocery at scale.
This is because Ocado’s large and efficient facilities address three plagues of the online experience for shoppers—selection, freshness and price—explaining how these issues play out differently in the physical and virtual worlds.
“When you’re in a store shopping, if you don’t find exactly what you went into the store to get, without even thinking about it you’ll pick something else yourself, and if [someone were to] survey you and ask if you found what you were looking for, you’ll say, 'Sure,’ ” he said. “But when you order online, you expect everything you’ve ordered to arrive, and you’re much less tolerant of any deviation.”
This is a problem that virtual shoppers can’t help but inherit when their orders are fulfilled through stores, where inventory is considerably less reliable than a gigantic warehouse that receives items directly.
“Statistically, you massively increase your probability to have products in stock because you haven’t devolved at/to multiple stocking points,” he said. “In addition, you can absolutely know what’s in your warehouse at any point in time, and you can even know what’s going to be in your warehouse at the next point in time, because you’ve got your flow of orders already in the system and you can be super accurate.”
A related benefit of Ocado’s system, Jensen added, is it provides items with guaranteed sell-by dates, obviating the inconsistencies associated with store inventories picked through for sell-by dates.
Photograph courtesy of Ocado
Finally, the hundreds of smart robots storing and retrieving the inventory from Ocado’s innovative grid warehouses, a system guided by AI that helps the process improve its reliability and speed as it goes, wipes costs from of the system by slashing touches and the relative labor required to prepare orders—savings that can more than make up for the costs of lengthier deliveries, though deliveries as well are guided by software that aids efficient routing.
Jensen echoes Kroger executives who’ve taken pains to point out that home delivery—primarily offered on a next-day basis from Ocado’s warehouse—is but one element of the e-commerce solution it is providing for Kroger. The companies earlier this month jointly announced that Ocado would provide software to aid the process of picking in-stores primarily to support faster deliveries and provide superior processes while Kroger awaits the completion of larger facilities. That will also get underway early next year.
“In-store fulfillment is going to continue to be a super important fulfillment channel for Kroger,” Jensen said, noting its software could tackle “any kind of routing,” including a shopper wandering a store picking orders.
The large sheds will in turn support a collection of smaller depots, microfulfillment centers and dark stores as needed to support a range of options between on-demand and next day.
“The curve that you can think of is that most cost-effective are the larger warehouses, and gradually your smaller warehouse micros, and then local fulfillment in the store, and you’ll have different degrees of flexibility around them,” he explained.
In Britain, the Ocado Zoom offering—a tech-enhanced on-demand service like a Walmart Express or Kroger Rush—supports deliveries of smaller orders in an average time of 34 minutes. That too is contemplated as part of the solution coming to Kroger.
The Direction of the Economy
Automation via robots that pick items is at the heart of Ocado’s warehouses, but the company is continuing to add to that stack. In recent months it has made strategic investments or acquisitions of tech companies that can support material handling like robotic arms and automated piece-pickers.
Photograph courtesy of Ocado
“We do technology for two reasons—and always where the two reasons are present, not one or the other,” Jensen said. “It’s going to save money. And the second reason it’s going to improve the quality of service.”
Ocado’s latest acquisitions are aimed at further streamlining the process of putting orders together—automating the final step of bagging individual orders before they’re out for delivery.
“Why are we looking to develop robotics to do that? We’re looking at it because ultimately, labor over time is getting more and more expensive, and tighter and tighter. And ultimately, these are not the jobs that are the most fun jobs to do for humans. That’s the direction of the economy in general,” Jensen said.
“We’re only going to do that when it is improving service,” he added. “You’re never going to use a robot if the result of the robot is a bunch of broken eggs in your shopping bags.”
Whirring robotic shuttles ferrying a basket of delicate fresh foods to a counterpart electronic arm that gently grips, extracts and places them into a shopping bag without crushing a single grape makes for dazzling visuals, and Ocado executives have never been shy about emphasizing the futuristic theater of its solution as a means of telling its story. But Jensen confesses that consumers won’t necessarily know—and may not even care—whether the grapes they receive as part of their home deliveries were picked by machines or people. They only want them fresh and affordable, insisting that difference will show for Kroger.
“Grocery shopping is not meant to be cool,” he said. “It’s meant to work—to give you great fresh products, at a great price, with great service, and on time.”
Conquering New Markets
The first two fulfillment centers Ocado will open with Kroger represent a contrast in extremes. Monroeville, Ohio, near Cincinnati, is deep in Kroger country, where its current market share exceeds 45%. But in Groveland, Fla., the nearest Kroger is some 200 miles across the Georgia state line.
Kroger has yet to detail exactly how it intends for its services and offering to differ between these disparate geographies—it’s certain to be a top topic at a scheduled strategy update in March—but Jensen notes they represent “the extremes of the spectrum between entering virgin territory and adding to the offering in some of your strongest territory. And I think what it signifies is that Kroger is approaching this in a way that really is going to follow that full spectrum of using online to conquer market share in new territory, and also to continue to add to its penetration in strong geographies.”
Jensen said he feels Kroger is uniquely suited for its solutions given its emphasis and leadership in fresh foods in the U.S., along with local market knowledge through its 2,700 stores, in most but not all geographies.
“If you look at Ocado retail in the U.K., the penetration of fresh food is actually higher than average U.K. supermarkets. We’ve been able to demonstrate that online can do a fantastic job with the right technology for fresh food,” Jensen said. “And so working with Kroger, who are really the No. 1 grocer nationally when it comes to a complete fresh offering really made it the most exciting partner. … They were the dream partner for us.”
The second annual go-round for the retail tech show Groceryshop drew about 3,000 attendees Sept. 15-18 to Las Vegas, where they heard from more than 200 speakers tackling topics ranging from consumer trends to supply-chain disruption, intelligent stores and retail reinventions.
As shopping paradigms and consumer demands evolve—aided by explosive advances in technology, automation and empowered consumers—speakers provided a glimpse into how the industry is grappling with its changing profile.
What follows are 10 takeaways from the Groceryshop stage.
Retail turnarounds aren’t cheap or easy, but if they ring true to your brand they can succeed, Stephanie Lundquist, EVP and president of food and beverage for Target Corp., said in her keynote address. The Minneapolis-based retailer’s $7 billion investment included a much-needed revamping of the mass retailer’s struggling grocery business, including an effort to hire and train grocery specialists to work in the department; a brand-new private label, Good & Gather, expected to become the chain’s biggest-selling food brand; and an overall approach to the department that more authentically reflected the chain’s traditional strengths in “Tarjay” style and positioning.
Previously, Lundquist confessed, Target lacked a “point of view” in food. Today, she says, “our goal in grocery is to be Target.”
Providing e-commerce capabilities and deliveries for more than 300 retailers in every channel of the food trade and partnering with more than 1,000 brands, San Francisco-based Instacart has surfed the digital revolution to an influential role in the grocery business. Is that a good thing?
In a conversation with WGB Executive Editor Jon Springer, Instacart Chief Business Officer Nilam Ganenthiran addressed questions of loyalty and perceived competition for advertising funds that have followed the fast-growing same-day delivery firm; provided an answer on its IPO aspirations (not yet); highlighted new white-label partnerships; and reflected upon the transformation of the industry.
“Instacart is a tech and logistics player. There are no games with us as far as becoming a retailer, or buying some products or not others,” he insisted. “We exist to be a partner of brick-and-mortar retailers, and that is our singular premise.”
Tom Ward, SVP of digital operations for Walmart, discussed how the big retailer was using technology—and data gathered from its own e-commerce experience—to expand its online shopping capabilities and efficiency while also improving service.
The Bentonville, Ark.-based company gets its shoppers to participate in its efficiency efforts by showing them the times when stores are least likely to be congested for pickup. And as Walmart gathers data from past shopping experiences, it is learning to automatically make substitutions for out-of-stock items based on those most likely to be accepted by the shopper, over similar situations. This keeps its pickers on task and shoppers happy, Ward said.
Ward also revealed that Walmart has expanded pickup at stores faster that it has added picking in-store. “We pick a hub and sweat this store hard," he said. That practice could realize additional efficiencies as Walmart puts robotic “middle mile” delivery between stores.
Narayan Iyengar, SVP of digital for Boise, Idaho-based Albertsons Cos., struck one of the key themes in the show when tackling a question over which e-commerce fulfillment technology he felt would ultimately win at supermarkets.
“Who’s going to win at the end? It’s going to be, ‘Yes, and ...,’” Iyengar said in a conversation with James McCann. “I think the answer to almost any question in the grocery industry is going to be, ‘Yes, and ... .’”
“Because the industry is so large and complex, and what works in Manhattan will not work in Wyoming and each will need a different model. There is plenty of opportunity for every model and its up to the retailer to look at what convenience value proposition do you want to have," he said. “What experience proposition do you want to have? How to do want the economics to work? … There will be no single model.”
Farhan Siddiqi said he considered four things before moving from McDonalds Corp., where he helped to effect a digital transformation, to Netherlands-based Ahold Delhaize, where he has been chief digital officer for the past eight months. Those four things are: The challenge had to be interesting; the company had to have vision of being No. 1; the opportunity to make a real difference had to be there; and it had to be fun.
In a keynote address, Siddiqi said he believed grocery e-commerce could reach a “tipping point” in the U.S. the same way other categories have—by first tackling the “pain points” that are in the way. The experience needs to become more intuitive and compelling; advances in same-day fulfillment need to convince customers to accept the notion that fresh goods can be picked for them; and the costs to fulfill need to come down.
Stu Landesberg of the online personal care and home products retailer Grove Collective, based in San Francisco, received applause from the crowd for his company’s line of packaging- and waste-reducing products, including super-concentrated laundry detergent sold with a proprietary reusable glass container that distributes only the precise amount needed; and a line of paper products made not of trees but from grasses such as bamboo and sugarcane. A virtual storefront needn’t require to sell products packaged in the same way they need to to attract eyeballs in the store—which can be a powerful draw for consumers making purposeful purchasing decisions.
Luke Jensen, CEO of Ocado Solutions, argued for what he called the superior economics and customer-experience advantages of the company’s robotic e-commerce distribution centers, with several now underway in the U.S. in exclusive partnership with The Kroger Co.
“Don’t think of e-commerce as a challenge,” he said. “Don’t think of e-commerce as a tough nut you need to crack. Don’t even think of e-commerce as an exciting sort of growth. Think of e-commerce and digital as a catalyst from which you can transform grocery for the better, from which you can address issues like waste [and] employment. Making it a more exciting and efficient sector, and ultimately providing a better customer experience all around.”
Barnaby Montgomery, founder of Yummy.com, disagrees with the widespread notion that grocery e-commerce is driven by harried consumers who hate making trips to the grocery store. “My position is that the experience at the grocery store is pretty awesome and I don’t need a delivery,” he said. “I’m relatively able-bodied and not homebound. I don’t live in Manhattan. Our customers aren’t in a rush. There is no urgency at home. They’re not hyperventilating waiting for a gallon of milk.”
Instead, it’s a simple question of convenience, which is why the Los Angeles-based business provides eye-opening services, such as 30-minute delivery and 10-minute pickup, because the one-hour and two-hour alternatives offered by competitors aren’t necessarily any faster than the hour a customer might take doing the job themselves.
Montgomery is a bit of an iconoclast in e-commerce. His business dates back to the first dot-com boom: Yummy doesn’t take on venture money, turns a profit and has developed proprietary systems and practices designed to manage deep customer relationships with local shoppers, who he notes, have viable alternatives.
The Groceryshop team for the first time presented original research at the show. Zia Daniell Wigder, co-founder and chief content officer, delivered a wide-ranging talk on the forces of change moving the grocery and consumer products industries, including a consumer-inspired move among companies to redefine the purposes of their corporations in the digital age, from one that primary focused on wins for shareholders and maximized profits. “Instead they should invest in their employees, provide value to consumers, deal ethically with suppliers and support local communities,” she said.
Groceryshop Content VPs Joe Laszlo and Krystina Gustafson presented a number of innovation strategies to consider for the future. Gustafson, for example, urged attendees to consider the possibilities demonstrated by digitally native brands such as Dirty Lemon, which are less concerned with traditional measures of store performance such as traffic and sales per square foot and instead are creating “Instagram-ready” stores in the hopes that customers will spread the word about them on social media. “Essentially they are using their stores as a means to get customers to do their marketing for them," Gustafson said.