The world of groceries in the U.S. is a tough market - and getting tougher. And while the clash of the titans that is Amazon and Walmart’s battle for the consumer’s whole paycheck tends to draw mass interest, particularly when the fight gets to groceries, it is far from the only big struggle in the vertical.
Kroger, the Cincinnati-based grocery conglomerate that’s behind some 2,764 grocery stores in the U.S., is in a race with its competitors and the increasingly digital future of grocery they embody. Racing, but according to reports out in The Wall Street Journal, perhaps not quite keeping pace.
While players both big and small were making digital investments like online ordering and delivery services, the report notes, Kroger lagged behind and stayed focused on its stores. The WSJ reports that decisions about tech upgrades were marked by indecision about how much to change, and potential technology partners reportedly stormed out of a meeting finding they were unable able to work within Kroger’s conservative corporate culture.
It's perhaps a smart, or at least understandable, move from the point of view of the present, given the overwhelming majority of grocery shopping that still happens in grocery stores. Not so smart a move given how quickly the grocery game has gone digital - and how quickly consumer behaviors are becoming multichannel. Online purchases account for just 5 percent of the roughly $1 trillion U.S. food and consumer-product market, according to Nielsen. Yet online sales are growing 40 percent annually in that segment, while in-store sales have been flat for years.
“We’ve got to get our butts in gear,” Kroger CEO Rodney McMullen said in an interview. “There was no doubt we were behind. It’s like driving on the autobahn. It’s incredibly exciting. But there’s a lot going on, and it’s going on fast.”
Though Walmart is America's largest grocery food seller, Kroger is the nation’s largest grocery chain. Relative to some of its peers in the online era, its progress in broadening the grocery experience has been somewhat slow. Amazon purchased Whole Foods in 2017 and turned Prime membership into a key for free grocery delivery within 2 hours. Walmart has dabbled in delivery, but has focused on curbside pick-up and expanded the service to over 2,000 stores.
Target bought Shipt Inc., another grocery delivery service, in 2017.
Now playing catch-up, Kroger has budgeted $4 billion for investments, including warehouses managed by robots, a meal-kit company and digitally LED enabled shelves that market directly to customers. It has also been expanding its curbside delivery options.
Those investments, though widely deemed necessary, have been costly - and at a time when market pressures are on all grocers to keep their price low.
“Kroger is in the very early innings of a business transformation,” he said. “This isn’t a one and done,” John San Marco, a research analyst at Neuberger Berman said, noting that Kroger is making the best long-term decision, though it will be an expensive and difficult one.
Kroger’s CEO noted that the slow investment in digital means they now have to work at a much faster pace, but that they were far from unique in the grocery segment in this regard.
“You have to start somewhere, and you have to learn,” he said on Kroger’s latest earnings call in March.
But Kroger has struggled in its efforts to get started, having recently tried and failed three times to partner or acquire three retail-connected start-ups: Shipt, the online grocery delivery service; meal-kit company Plated; and Boxed.com, a bulk online retailer. Target bought Shipt in December 201; Albertsons Cos. grabbed Plated in 2017 and Boxed executives and investors balked over terms offered by Kroger and the deal stalled in early negotiations.
“They aren’t willing to pay enough to buy technical talent,” said one person involved in negotiations between Kroger and those startups.
Yael Cosset, Kroger’s chief digital officer, declined to comment on any negotiations but did note the firm is more conservative in rolling out tech pilots that directly affect customers in stores. Kroger has also noted they are working with Microsoft Corp., Oracle Corp., IBM Corp. and other tech companies, and is spreading the word about Kroger to potential tech startup partners at the Cincinnati-based Cintrifuse startup investment fund.
“Kroger has been very bold in their vision,” said Luke Jensen, chief executive of Ocado Solutions, a division of U.K.-based automated-grocery company Ocado Group PLC that Kroger has invested in to build a network of automated warehouses for online retail in the U.S. “They are learning from us, but we are learning from them.”
And it is worth noting that every report out of Kroger country of late is not negative. New data from industry tracker Chain Store Guide indicates Kroger's market share in increasing in some cases, and at the expense of its more technologically-enabled rivals. In its home Cincinnati region, sales were up increased 4.9 percent over the last two years to 49.3 percent of the region's total $6.1 billion of groceries sales in 2018. The chain has also eked out notable gains in LA, Dallas, Phoenix and Detroit among other major metros.
Terry Kelly, a principal at Bartlett & Co. in downtown Cincinnati noted the data is encouraging, suggesting Kroger's price cuts are working - and could work even better when paired with a stronger digital strategy.
"Kroger is used to this type of warfare," Kelly said.
But, he also noted, that it is going to be a long war, a pitched battle which has more knowns than unknowns at this point.
Like the toll on profits that both price-cutting and billions of dollars of investments can do to a bottom line.