Amazon’s acquisition of Whole Foods in June 2017 shook the supermarket industry on fears that the newly merged company would quickly take share from traditional supermarkets and has forced grocers to boost their online delivery options. How incumbents, such as Kroger, respond to Amazon’s ambitious plans will determine who survives in a rapidly changing landscape.
US grocery industry poised for online growth
Online grocery sales were $20.5 billion in 2016, approximately 4.3% of total US food & beverage sales. A 2017 report by the Food Marketing Institute and Nielsen suggests that the online grocery channel could grow to $100 billion, or 20% share by 2025, representing a 20% CAGR and a significantly faster growth rate than offline grocery and overall US e-commerce . Growth so far has been fueled by tech-savvy millennials who are more accustomed to online shopping and the proliferation of online services such as Amazon Fresh, Fresh Direct and Instacart offering convenience and quality.
Consumers are also spending more time on digital platforms and it is increasingly important for retailers to find ways to engage with their shoppers on these platforms. Indeed, the same report found that roughly 3 in 5 grocery shoppers look for sales or coupons on their mobile devices before entering a store and >50% use mobile apps to shop at the store .
At the end of 2016, Kroger was the second largest US grocer behind Walmart with a 7.2% market share, 2,796 supermarkets and 784 convenience stores , . With online taking share from brick & mortar and shoppers becoming more digitally savvy, Kroger needs to reconfigure its strategy to ensure that it maintains its position in the industry.
Kroger offers two click-and-collect services; Express Lane, which it acquired in 2014 alongside its acquisition of Harris Teeter, a Southern grocery chain, and ClickList, which it launched in select markets in 2014. For a $4.95 fee per order, ClickList allows customers to buy groceries online, then pay and collect their goods at a pick-up window at an appointed time without having to leave their car. The service was offered in 637 supermarkets at the end of 2016 . Kroger is also experimenting with home delivery in partnership with 3rd parties, such as Uber . In 2014, Kroger also acquired Vitacost.com, an online retailer of health and wellness products with 40,000 items across 2,500 brands . While Kroger does not breakout its online sales, digital revenues were +126% YoY in Q2 2017, driven predominantly by ClickList .
Kroger is also using its customer analytics arm, 84.51°, to improve the customer experience through personalized recommendations on ClickList as well as targeted and curated digital coupons and content (e.g., recipes, videos). Kroger found a 33% increase in ‘add to cart’ among top search results on ClickList once search capabilities were personalized .
Kroger’s near-term future investments should focus on more effectively using its physical asset base. The two main areas of investment should be:
- Invest in pick, pack and home delivery capabilities in DCs and back-of-stores to complement ClickList
- Different business models are suited for markets with different levels of grocery e-commerce adoption (e.g., while ClickList is appropriate for a new market, it may be more cost-effective to fulfill higher volumes of online orders directly from a DC, which would reduce the intermediary inventory handling costs). Kroger’s truck fleet is already equipped with cold chain logistics and can deliver orders to the closest store or central hub where a 3rd party can provide last mile delivery
- By fulfilling from DCs, consumers are not limited by the SKU availability or store hours of a particular store. As volumes grow, Kroger could reduce labor costs by investing in automated picking
- DCs allow Kroger to reach consumers outside regions with a Kroger supermarket and generate incremental sales by leveraging the store network across all banners
- Reconfigure store formats to reduce costs which can help fund capex
- Shut down stores within proximity of each other that do not generate sufficient incremental sales. As dry goods move online, focus on fresh goods in-store in a smaller box, using back of store to fulfil online orders
- Drive traffic using digital targeting and new, unique offerings (e.g., fresh prepared foods)
Amazon’s acquisition of Whole Foods suggests that the winning strategy in the grocery category is a combination of brick & mortar and e-commerce. Incumbent grocers and VC funds are investing hundreds of millions of dollars into online grocery solutions, but none have gained traction yet. Which model will emerge as superior and what will its characteristics be? Will traditional grocers be able to re-tool their supply chains to effectively utilize their cold chain logistics and store networks to their advantage against Amazon or is it already too late? (794 words)
 Jeff Daniels, “Online grocery sales set to surge, grabbing 20 percent of market by 2025,” CNBC, January 30, 2017, https://www.cnbc.com/2017/01/30/online-grocery-sales-set-surge-grabbing-20-percent-of-market-by-2025.html, accessed November 2017.
 Christina Cheddar Berk, “Amazon and Whole Foods control only a sliver of the grocery market — for now,” CNBC, June 16, 2017, https://www.cnbc.com/2017/06/16/amazon-whole-foods-control-only-sliver-of-the-grocery-market-for-now.html, accessed November 2017.
 The Kroger Co., 2016 Kroger Fact Book, p. 6, http://ir.kroger.com/Cache/1500100492.PDF?O=PDF&T=&Y=&D=&FID=1500100492&iid=4004136, accessed November 2017.
 James Melton, “Kroger kicks its online grocery ordering service up a notch,” Digital Commerce 360, March 8, 2017, https://www.digitalcommerce360.com/2017/03/08/kroger-kicks-online-grocery-ordering-service-notch/, accessed November 2017.
 The Kroger Co., 2016 Kroger Fact Book, p. 48, accessed November 2017.
 The Kroger Co., August 12, 2017 Form 10-Q (filed September 15, 2017), p. 16, http://ir.kroger.com/Cache/390302703.pdf, accessed November 2017.
 The Kroger Co., Kroger Investor Conference October 11 2017, p. 29, http://ir.kroger.com/Cache/1001228339.PDF?O=PDF&T=&Y=&D=&FID=1001228339&iid=4004136, accessed November 2017.