Kroger’s eCommerce Strategy - What You Need to Know

Picture of a Kroger store
 

By Tricia McKinnon

For many years online grocery sales were almost a rounding error. But in 2020 everything changed. With the arrival of the COVID-19 pandemic many consumers found themselves shopping online for groceries for the very first time and grocers found themselves struggling to keep up. While the vast majority of grocery sales in the United States, 92.6%, took place in-store in 2020, online grocery sales grew quickly, up 54%. Now that consumers have had a taste of shopping for their broccoli and oatmeal online there is no turning back.

Kroger is one of many grocers benefiting from the surge in online grocery sales. In 2020 Kroger’s online grocery sales grew by 116% surpassing $10 billion. Kroger now ranks among the top ten eCommerce retailers in the United States. On the back of these tailwinds Kroger is planning to double its eCommerce sales by 2023. If you are curious about how Kroger is planning to achieve this goal take a look at five areas it believes are critical to its success.

1. A partnership with Ocado to build large fufillment centres. With online grocery sales growing quickly Kroger is doubling down on its investment in this area. Back in 2018, foreseeing what the future could like Kroger announced a partnership with British online grocer Ocado to build 20 large automated warehouses to fulfill online grocery orders. These warehouses, called “sheds”, range in size from 135,000 sq. ft. to 375,000 sq. ft. and cost between $50 million and $100 million each to construct. The sheds are supposed to be more economical using only 60% of the labour and capital required for 20 stores. Kroger’s first shed in operation, coming in at 375,000 sq. ft, opened in April in Ohio. The shed is manned by around 1,000 robots and 400 employees. Kroger believes that by their fourth year in in operation the sheds will be  as profitable as stores. 

But not everyone is as bullish as Kroger on this approach. “This is a pretty big gamble in untested waters,” said Robert Moskow, an analyst at Credit Suisse. “I would have chosen a more flexible, less capital-intensive approach. There’s a lot of unknowns out there.” There are many costs Kroger has to absorb including labour for baggers and delivery truck drivers in addition to a fee of up to an estimated 5% of sales to cover the cost of bots and software that is used to run the sheds. “It’s unclear to us whether the Ocado model can operate profitably in U.S. markets,” said Moskow.

Many point to Walmart as having a better model. In January Walmart announced it’s opening dozens of 20,000 sq. ft. to 30,000 sq. ft. market fulfillment centres or mini warehouses either adjacent to its stores or in their backrooms. These fulfillment centres use automated bots to gather items for online orders but then personal shoppers assemble the final order. The fulfillment centres are also closer to home, reducing last mile delivery costs and enabling faster shipping. Walmart’s model may also be a better option for fulfilling click and collect orders which is a popular way of shopping for consumers. "This [Kroger’s partnership with Ocado] is primarily a next-day service," said Kelly Bania, an analyst at BMO Capital Markets but "the US has really evolved into such a same-day market."

2. A partnership with Instacart to fulfill smaller, conveince orders. Not wanting to leave same day delivery up for grabs, Kroger entered into a partnership with Instacart to provide this service. The service, which was announced last week, is called Kroger Delivery Now. It allows customers to shop online from an assortment of 25,000 fresh grocery items as well as household staples. Orders are fulfilled by Kroger and delivered by Instacart. Customers can get their order delivered in as little as 30 minutes and is available to 50 million homes across the United States. 

Kroger is touted as the first supermarket to offer a “national convenience delivery solution.” Shoppers buying convenience based orders online like snacks for an afternoon treat are on the rise with Instacart’s convenience category growing by more than 150% since May of 2021.

In the name of convenience, shoppers can also order 24 hours a day, seven days a week. “Kroger Delivery Now’s comprehensive offering of 25,000 items combines customer favourites with quick and easy doorstep delivery—whether they’re shopping for a meal, snack, last-minute ingredient, over-the-counter medication or diapers,” said Kroger and Instacart in a joint statement. 

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3. Increasing advertising sales. While eCommerce is loved by shoppers its expensive for retailers. Bain & Co. estimates the operating margin on in-store grocery sales on average is between 2% and 4%. When a grocery retailer picks groceries in-store for a click and collect order the margin drops to -5%. If the order is picked from a store and delivered to the customer’s doorstep the margin is a stark -15%. To recoup some of these costs retailers focus on alternative streams of revenue and no one does this better than Amazon. Amazon has many lines of business outside of its core retail business that improve its profitability. These businesses range from AWS, its cloud computing business, to advertising.

Amazon is expected to earn $23 billion in advertising revenues in 2021 up 30% from last year making Amazon the third largest digital advertiser in the United States behind Google and Facebook. Analysts estimate Amazon’s advertising business has margins as high as 75%. 

With Amazon far in the lead retailers like Kroger are trying to catch up. Kroger has been pushing brands to sell on its digital properties for the last few years recognizing how beneficial this line of business is. “As previously shared, two key drivers of long-term digital profitability are the cost to fill a digital order and the retail media revenue generated from a digital transaction. In the first quarter, we reduced the amount of time taken to pick a digital order by 5% and increased media revenue per digital basket by 33%. Gross margin was 22.6% of sales for the [first] quarter of [2021],” said Gary Millerchip, Kroger’s CFO. 

Also speaking about the importance of retail media Kroger’s CEO Rodney McMullen said: “alternative profit continues to be a significant growth driver in our model and contributed $150 million of incremental operating profit on top of the $100 million of incremental profit in 2019. Retail media fueled this acceleration, and we continue to see significant opportunity for additional growth in the future,” said McMullen.

4. Growing marketplace sales. Online marketplaces are also seen as an important part of future growth for many retailers. Amazon, eBay, Alibaba’s Tmall and Japan’s Rakuten are examples of popular online marketplaces but now traditional retailers are trying to get a piece of the pie.

What’s the difference between an online marketplace and let’s say simply shopping for food on Kroger’s website? In an online marketplace sellers typically pay a commission on each sale made on the marketplace and the marketplace owner does not own the inventory. These sales are called third-party sales. If a retailer, like Kroger, does not have third party sellers on its website then it can buy merchandise wholesale, which it then owns. After the retailer buys goods wholesale it charges customers a markup when they are sold online. 

Online marketplaces are growing in popularity for several reasons. For one the retailer doesn’t have to tie up working capital to maintain inventory levels. The retailer also doesn’t have to worry about clearing out end of season inventory at low prices which eats into profits. That risk sits with the third-party seller. 

Many of the largest retailers in the world are building out their own third-party marketplaces. This is a natural fit because they already have millions of customers who visit their websites. Walmart is one of these retailers. Walmart has 100 million unique visitors to its website each month. To boost eCommerce sales Walmart is focusing on adding more third-party sellers to its online marketplace and sees that as a “huge opportunity.” 

In the second quarter of 2020 Walmart’s marketplace sales were up in the triple digits, growing faster than its first-party eCommerce business. Growth in marketplace sales have also had a positive impact on Walmart's margins. Since Walmart’s online sales still aren’t profitable expanding its online marketplace is a way to achieve profitable sales growth.

Last August Kroger announced it was launching an online marketplace with more than 50,000 items. Its marketplace will allow Kroger to sell a broader range of goods in categories outside of its core business including toys. 

Amazon has also increased the proportion of its sales that come from third party sellers. In 2021 it is forecasted that Amazon’s third party sales will reach $220 billion to account for 60% of Amazon’s eCommerce sales. 

5. Investing in click and collect. Trying to cover all bases, Kroger has an initiative called Hometown Pickup which it started piloting last year. Hometown Pickup is a way to reach customers in rural or underserved regions of the United States where customers do not have convenient access to a Kroger store. “We launched an initiative to support first responders, creating pickup locations in local hospital parking lots to make it easier for them to get their groceries where and when it was most convenient without compromising on the expense. We saw firsthand how much of a difference that made in their lives to give them that time back,” explained Yael Cosset, Kroger’s CIO and Chief Digital Officer. Proving that stores are still as relevant as ever, click and collect sales in the United States were up 107% last year and are expected to reach $84 billion in sales this year.

Tricia McKinnonStrategy & Growth, eCommerceComment