Kroger rolls out robots to take on Amazon
Kroger Co., the giant but aging supermarket chain, has unleashed a flurry of initiatives to ensure it won’t get thumped in a post-amazon-buyingwhole-foods world: It has revamped locations, bought a meal-kit company, and sold off its convenience-store business. Its biggest gamble, though, is a partnership with British online grocer Ocado Group. The two plan to build as many as 20 automated grocery warehouses in the U.S. to help Kroger turbocharge its e-commerce operation.
Grocery has proven a uniquely tough business to bring into the online era. Orders often have dozens of items — some frozen, some cold, some room temperature — and much of the inventory is perishable. That simply makes for a different challenge than the one Amazon.com has successfully tackled by getting a single laptop computer or phone charger on your doorstep in one day.
Ocado has focused on digital grocery shopping for its entire corporate life, and it shows. At its newest online grocery fulfillment center outside London, 1,000 robots
zoom around a grid at 13 feet per second, extending a gripper to pick up and transport bins of groceries. The system strips out labor costs and enables human workers to pack about 600 items per hour. Every aspect of the fulfillment process is designed for the unique quirks of grocery, including systems that cue workers about what items in a given order they should put in a single grocery bag. (This ensures, for example, that something heavy doesn’t plop onto a dozen eggs.) Ocado estimates its system saves one hour of labor for every 50-item order — no small thing in a segment of retail with notoriously thin profit margins.
There is a real benefit to specializing in solving the grocery conundrum, as Ocado has done. The company’s sales increased 12% last year to $2 billion, according to its annual report, and its active customer count increased 11% from the previous year. So Ocado well could improve Kroger’s game and equip it with advantages in the battle for U.S. market share. Ocado’s system will enable it to fill orders especially quickly and has a high level of accuracy — both important contributors to customer satisfaction. Down the road, it’s not hard to envision even more labor costs getting stripped out of Ocado’s system, enhancing the model’s profitability. But timing is everything in the fast-changing online grocery world. And right now, Amazon and Walmart Inc. are leading the pack.
Neither Amazon nor Walmart has a system with the wizardry of Ocado’s; even so, each is exploring its own ways of using automation to help with profitability and customer experience. Walmart is testing driverless cars for grocery delivery, and Amazon recently showed off some new warehouse robots of its own. It will take Kroger up to five years to build out the fleet of Ocado warehouses it has committed to. That might not be fast enough to vault it past Walmart and Amazon in the race for online grocery supremacy — no matter how advanced and efficient Ocado’s system is.
Take the delivery vehicles Ocado has developed: They can be loaded with racks of grocery-filled bins designed to fill available cabin space and they have a separate compartment for cold items. A routing algorithm helps ensure they are loaded in an order conducive to a driver’s delivery path, and it optimizes the path for efficiency. This sounds way more efficient than some of the solutions Walmart and Amazon use these days, where a Doordash or Amazon Flex contractor-courier loads his car with groceries. But that efficiency gain is only useful if Kroger can get enough orders to make it count.
Investors have already punished Kroger this year for disappointing on comparable sales growth and its annual profit forecast. It’s hard to assess how much this project might further test their patience, especially because the companies haven’t offered specifics on how they will share the costs of establishing and maintaining these facilities. But it won’t be cheap: Kroger has said it is investing $55 million to build the first of the Ocado-powered fulfillment centers.
It might help if Kroger talked up other ways the warehouses might support its business later, such as one day sending replenishment stock to nearby stores. And the new warehouses, in some cases, will be positioned to expand Kroger’s addressable market. One of the first facilities Kroger committed to building is in central Florida, a market that Bloomberg Intelligence analyst Jennifer Bartashus points out is one where regional heavyweight Publix Super Markets Inc. is beloved and ubiquitous and Kroger doesn’t have much presence. Kroger sees opportunity to crack this market with a compelling online offering.
Overall, Kroger is better off for having partnered with Ocado. But the arrangement might not jolt the broader U.S. grocery industry the way it could have if it had been forged three or five years ago, before the competition had fully awakened to the e-commerce opportunity. Better late than never.