Kroger Is Primed for Battle

Amazon might be the champion of e-commerce, but Cincinnati’s largest company isn’t giving up its grocery leadership position without a fight.

Illustration by Rami Niemi

Kroger’s newest superstore, on Harrison Avenue in the heart of the west side, is a 120,000-square-foot marvel complete with a beer and wine bar; a Starbucks; a liquor store; a cheese shop; a gas station; and a line of clothing for Mom, Dad, and the kids. It’s a classic Marketplace store, built for strolling through well-stocked aisles—perhaps with a caramel latte, shopping list, and coupons in hand—and loading up a big cart with a week or two worth of groceries and home supplies.

Downtown, meanwhile, Kroger’s new urban concept store opened in September to serve those living and working in the city center. It’s less than half the size of the Green Township location, and features a food hall with local restaurants and a sidewalk Starbucks window.

The future for Cincinnati’s largest corporation, however, may depend less on building bigger and better stores than on serving shoppers who instead buy their groceries from home, sitting at their work computers, or tapping away on their phones.

Kroger is facing unprecedented pressure from an unlikely source: Amazon. The company that delivers books, music, housewares, and streaming video to your home wants to deliver you groceries as well. And that’s hastened Kroger’s expansion into the digital world long dominated by the Seattle-based giant.

Kroger’s transformation took on new urgency in 2017, when Amazon announced it was getting into the grocery business.

“Kroger is transitioning from a grocery company to a growth company, from physical to omni-channel,” says CEO Rodney McMullen. “And we are partnering with the world’s best innovators to accelerate this transformation. We’re doing things to invest in the future to be where the customer is.” It’s a brave new world for the 136-year-old company started by Barney Kroger that built its megabusiness literally from the ground up, with brick-and-mortar stores offering a wide selection of groceries at competitive prices.

How the battle plays out will have an impact here on shoppers, workers, and investors. Kroger is by far the dominant grocer in this region, claiming nearly half the market share in its hometown. It’s also the biggest employer, with 460,000 employees nationwide and more than 21,000 here, and it brings in more than $120 billion in annual revenue, nearly twice the sales of Procter & Gamble.

With almost 3,000 stores hosting 11 million customers a day, Kroger is battling for traditional grocery shoppers against the likes of Walmart and Meijer in this region and with Publix, Safeway, Food Lion, and many more in other cities across the U.S. Now it must vie for online shoppers with these same competitors and with the undisputed champion of e-commerce.

Besides investing in e-commerce, Kroger is also adapting to how shoppers use its physical stores. The smaller footprint downtown store opened in September.

Photograph by Lance Adkins

Kroger’s transformation took on new urgency in 2017, when Amazon announced it was getting into the grocery business. The digital behemoth bought Whole Foods Market, a company known for its selection of organic and natural foods, and all 460 of its stores in a blockbuster deal valued at $13.7 billion.

The news shook up the grocery industry. Suddenly, the company known for selling books and housewares online was on top of the grocery world—or so it seemed. Kroger, a relative newcomer in the world of online shopping, was in danger of being overwhelmed, investors believed.

Shares of Kroger stock fell 9 percent the day of the Whole Foods announcement. Shares of traditional grocery chains, including Target and Walmart, also tanked that day. Amazon stock, already in the stratosphere at around $1,000 a share, rose another $30 or so as Wall Street contemplated the possibilities of joining Whole Foods’s trendy food brands with Amazon’s groundbreaking prowess in selling goods online and delivering them.

Kroger’s digital offerings have grown enough that the company claims it can now serve nearly every household in America with either a physical store or an online service.

Investors’ reactions reflected the conventional wisdom that Kroger was a boring throwback, a one-note company whose time had passed that certainly wasn’t up to slugging it out on the digital battlefield. At Kroger headquarters on Vine Street, though, executives took the news in stride. “When Amazon bought Whole Foods, it didn’t surprise us at all,” says McMullen. If Amazon wanted in on the grocery business, it would need actual stores, because selling groceries online is different from selling books. “It’s incredibly important to have an online presence and a physical presence,” he says. “People shop back and forth between the two depending on what’s going on in their lives.”

In fact, Kroger has been quietly gearing up for the digital grocery battle for years, launching new initiatives and experimenting with high-tech alternatives that Barney Kroger couldn’t have dreamed of when he spent his life savings of $372 to open a shop on Pearl Street downtown. The moves have been geared to consumers’ changing shopping habits, something Kroger knows a lot about through daily harvesting of data from its millions of shoppers.

“We know customers’ needs are evolving,” says Jody Kalmbach, vice president of digital experience. “They want to be able to access groceries, meal solutions, and all of those products in a lot of different ways.”

Although still in its infancy, Kroger’s digital offerings have grown enough that the company claims it can now serve nearly every household in America with either a physical store or an online service. “By the end of this year, everyone in America will have the ability to shop with Kroger,” says McMullen.

Kroger’s sales through its digital channels have accelerated rapidly, logging 58 percent growth in 2018. But that’s not to say the actual dollar amount is breaking the bank.

Kroger executives won’t specify digital sales numbers, but analyst Sucharita Kodali of Forrester Research estimates it’s a small slice of the company’s total sales. “My estimate is that Kroger has 2 percent of their sales, tops, happening online,” she says.

Most of Kroger’s digital sales come from its Pickup service, formerly called ClickList. At the Green Township Marketplace, one corner of the store is dedicated to the service, with “Pickup” in large black letters above the doors and eight parking spaces in front.

Pickup is all about convenience. I tried it three times, mostly with good results. I chose the service because the fridge was empty, I had deadlines to meet, and I didn’t want to take the time to wander the sprawling store and wait in line to check out.

“Online grocery will be among the top 10 product categories driving e-commerce sales over the next five years.”

I logged on to, selected “Pickup” from the menu and began shopping. Since Kroger tracks my purchases every time I use the Kroger Plus card, the site suggested my favorites as well as staples, and I was able to quickly search for other items.

I then scheduled a pickup time in a one-hour window for the same day. At the appointed hour, I pulled into one of the special parking spaces, called the number on the sign, let them know I was there, and popped the trunk. On my first two pickups, I waited less than five minutes for the car to be loaded, which is Kroger’s goal. But on the third, made late on a Sunday morning, I waited 25 minutes for my trunk to be loaded. It’s clear Pickup is beginning to catch on, because all the parking slots were full on that day. Kroger charges a fee of $4.95 for the service, which was waived my first two visits but added the third time.

Overall, e-commerce is growing at a healthy rate across the U.S.: 16 percent from 2017 to 2018, according to Forrester Research. And as growth in online sales of things like clothing and electronics moderates, grocery sales could pick up the slack. “Online grocery will be among the top 10 product categories driving e-commerce sales over the next five years,” predicts Forrester analyst Michael O’Grady.

Kroger is counting on UK-based Ocado to run its delivery business. The first of 20 automated Ocado warehouses is being built now in Monroe.

Photograph courtesy Kroger

With eyes on the future of shopping, Kroger is investing heavily in ways for consumers to buy groceries online and in delivering the goods outside of the store. But the company isn’t making money yet. In corporate-speak, digital is a “headwind” on the balance sheet, slowing overall profitability rather than accelerating it.

“Online investment is still a headwind, but not as much as it was,” says McMullen, adding that spending on online services now is an investment in the future. “It takes three to five years for a customer shopping online to be as profitable as a customer shopping in a store.”

Kroger executives hope to reduce the cost of e-commerce through a partnership with a U.K.-based company that uses robots to fulfill orders from massive high-tech warehouses.

The profitability problem is not unique to Kroger. “This is a problem across the board in the industry,” says Kalmbach. “E-commerce as a method of getting things to consumers’ doorsteps has a fundamentally different economic model, with an additional layer of cost beyond what the traditional brick-and-mortar grocer has to deal with.”

Kroger’s Pickup service, for example, requires a team of employees dedicated to collecting and packing customer orders. “That human can pick maybe 60 items, or three orders an hour,” says Kodali of Forrester Research. “It can cost anywhere from $5 to $7 to fill an order. And that’s not trivial.” It’s not, especially when you staff 1,700 Pickup locations across the country, as Kroger does.

Kroger executives hope to reduce the cost of e-commerce through a partnership with a U.K.-based company that uses robots to fulfill orders from massive high-tech warehouses. In May 2018, the company announced a deal with Ocado, an online grocer that also operates automated warehouses and provides the software, logistics, and route planning to run a grocery delivery business. Kroger now owns 6 percent of Ocado and enjoys an exclusive agreement for its services in the U.S., shutting out other grocers.

Kroger is counting on Ocado to run its delivery business and to do it cost effectively. “Ocado is significantly more efficient than the way we’re doing it today,” McMullen told investors in September, though it will be a couple of years before the warehouses contribute to the company’s bottom line. “We would typically expect a facility to be in year two or year three before it gets to profitability.”

In June, officials broke ground on the first U.S. Ocado warehouse in suburban Monroe. It will be an enormous facility, about the size of seven football fields, and when finished will feature a multi-tiered grid with wirelessly operated bots zipping back and forth assembling customer orders.

Kroger is investing $55 million in the high-tech warehouse, which will serve as a model for 20 others around the country. In July, the company broke ground on a second Ocado warehouse, in Groveland, Florida. That location is significant because Kroger currently has no brick-and-mortar stores in the state, so Floridians’ first encounter with Kroger will be through its online delivery service. The company has also announced that Ocado warehouses will be built near Atlanta and Dallas.

Kroger currently works with San Francisco–based delivery service InstaCart to handle getting groceries from the store to the door for shoppers who choose the delivery option. I tried delivery one day, going again to to fill my virtual cart. I confirmed the order around 10:30 a.m., and by 11:06 I received a text that “Karen W. just started shopping!” She had to substitute a couple of items that she either couldn’t find or were out of stock, and I received text updates.

At 11:40, I got a text saying, “Kroger is on the way! Delivery estimate 11:55 a.m.” At 11:48, the InstaCart driver showed up at my door with the goods. The service isn’t cheap: a $9.95 service charge was added, along with a $3.72 tip for the driver. But it was quick, easy, hassle-free, and a big timesaver.

There are challenges with ordering online, especially when your desired items aren’t available and store employees have to find substitutes or drop them altogether. “You have a percentage of the items that aren’t findable, so you have to put substitutes in or just not fill that item, and that leads to customer disappointment,” says Kodali. Indeed, my favorite salsa wasn’t available on one order and whole wheat pizza crusts weren’t on another, and the store pickers failed to find suitable substitutes. I probably could have found good alternatives if I’d been walking the aisles myself.

Kroger is testing a grocery delivery service in Houston using driverless vehicles.

Photograph courtesy Kroger

Kroger is experimenting with other high-tech services beyond Pickup and delivery. In August 2018, the company launched its Ship service in four markets, including Cincinnati. Ship is designed largely to buy items in bulk, such as dog food, natural and organic items that can’t always be found in stores, and Kroger’s own private brands. Delivery is free for orders of more than $35 but can take about a week, delivered by FedEx or another package carrier.

In April, the company launched a delivery service in Houston using autonomous vehicles.Shoppers can place orders from two Houston stores seven days a week, scheduling delivery for the same day or the next by a self-driving vehicle. The company is working with Nuro, a Silicon Valley startup that builds driverless delivery vehicles.

This summer, the company started piloting a service called Rush, which promises delivery, including hot food, within 30 minutes.

Early this year, Kroger announced plans to collaborate with Microsoft to test the Seattle-based giant’s EDGE technology in stores. Enhanced Display for Grocery Environment is a shelving system that uses digital displays instead of traditional paper tags to communicate everything from prices and promotions to nutritional and dietary information. The technology can sync with Kroger’s Scan Bag Go service, which uses a smartphone app to let shoppers scan items as they shop and then pay on their phones or at special checkout kiosks.

This summer, the company started piloting a service called Rush. To place orders, you must download the Rush app and live or work within three miles of the Newport or Oakley stores, says Kroger spokesperson Erin Rolfes. Rush promises delivery, including hot food, within 30 minutes, making it a potentially good option for catered business lunches.

But for all its investment in new digital services, Kroger doesn’t seem to have convinced Wall Street that it can thrive in the e-commerce grocery world. Since 2015, when the stock hit a high of $42 a share, Kroger shares have been in the doldrums, sinking as low as $20 in the months after the Amazon announcement and hovering in the mid-$20 range since then. Kodali says that’s because Kroger is under pressure not only in the online arena from the likes of Amazon/Whole Foods but also in its bread-and-butter business, traditional grocery shopping. “It’s not just online that is nipping at their heels,” she says. “You have so many offline competitors and specialty competitors.”

In the Cincinnati market alone, those include Walmart and Meijer, of course, along with Target, Costco, Aldi, and Trader Joe’s, plus neighborhood options like Findlay Market and Clifton Market. “They’re getting Blockbusterized,” says Kodali. “That’s their problem. You have competition online, but you also have all this competition offline as well. Blockbuster had Netflix, but they also had Redbox and streaming video—all these alternative ways to get the same product. That’s what Kroger is up against.”

Investment analyst Nicholas Ward says while Kroger may be “a relatively boring name,” its size and efforts in the digital space should make it worth a look from the investment community. “Kroger is more than meets the eye at first glance,” Ward says, while also citing the threat of competition from traditional and nontraditional grocers. “Kroger’s longstanding business model is ripe for disruption. While it’s clear that Kroger is doing its best to compete for digital customers, e-commerce in the grocery space adds yet another question mark.”

One Wall Street investment analyst, Bernstein’s Brandon Fletcher, even recently noted that Kroger’s flatline stock performance could make it a target for an activist investor or corporate raider, à la Nelson Peltz at Procter & Gamble. But Kodali and other industry watchers point to Kroger’s strengths, which will come into play in what’s sure to be a long evolution of online grocery shopping. “They have good name recognition,” she says. “They have a national footprint of stores. They have a good supply chain.”

Kroger’s nationwide network of stores will be a critical link in getting perishable groceries from the store to the digital consumer quickly. It’s a major advantage over Amazon, which has dabbled in groceries and tried to catch up with the Whole Foods acquisition. “Amazon has tried, tried, tried,” says Kodali. “This is one category where Amazon has visibly struggled.”

She notes that the world of online grocery shopping is a long game that’s still in its infancy and will change over the years. Kroger, she says, can compete. “This is the beginning of the first inning,” the analyst says. “There’s a long way to go. They have as much a shot at winning here as anybody.”

Facebook Comments