How is Kroger Fending off the Attack of Grocery Delivery Companies?
Millennials are shopping less and less at grocery stores in favor of restaurants and the booming grocery delivery services. Despite this, Kroger, the largest grocer in the country by revenue, is thriving. Kroger leverages technology through data collection, online ordering platforms, "smart shelves", and speedy checkout. But is that enough?
The traditional grocery store is in danger. Current trends reveal more people are dining at restaurants than making food at home.[1] Furthermore, groceries are purchased through alternative sources: online like AmazonFresh, large convenience stores, and retail giants like Wal-Mart.[2] To stay competitive, traditional grocery stores should find creative ways to leverage digital technology to enter new distribution channels, increase connection with customers, and decrease costs. Kroger, the largest supermarket chain in the U.S.,[3] has weathered this storm by leveraging several technological and digital integrations.[4]
Kroger aims to provide value to its customers with quality products, good prices, a pleasant shopping experience, and personalized rewards for a customer’s loyalty.[5] Kroger’s value proposition and business model have remained largely constant, however, three examples of how Kroger now incorporates digital technology are: online grocery ordering, experimentation with digital shelving, and collection and analysis of “big data.”
Technology Integration at Kroger
In 2015, Kroger initiated ClickList allowing customers to order online and pick up at the store.[6] This service was a response to the booming “e-Grocery” industry, but differs in that it does not deliver groceries to the customer’s door. Although Kroger has not released any sales or user information on ClickList, public response has been positive with plenty of ground to gain in the rapidly growing $9.4 billion industry.[7]
Kroger is also experimenting with Smart Shelving that will alert customers when they pass products they may need, provide targeted advertising, and reduce labor costs associated with re-pricing by hand in the current model.[8] Beacons throughout the store will track the location of phones that use the Kroger app to provide these services. The largest cost saving potential with this technology might be in targeted advertising, where Kroger spent $648 million in 2014.[9] By offering relevant, personalized offers, Kroger has achieved marketing response rates of over 60%, which will significantly reduce advertising spend and increase inventory management efficacy.[10]
Finally, and arguably most importantly, Kroger is leveraging “big data” collection and analysis to better understand its customer and influence strategy. Kroger acquired Dunnhumby USA’s data-mining technology in 2015, forming its own data collection and analysis company, 84.51°.[12] Effectively capturing and analyzing customer data – through means such as motion sensors, temperature sensors, online shopper profiles, purchase history, and weather- enables Kroger to increase operating margins in the following ways: improving inventory forecasting; analyzing customer buying patterns to inform negotiations with suppliers; determining which products to carry and where based on local demographics; and developing customer loyalty programs to increase the lifetime value of each of their customers.[13] According to Kroger executives at its annual investor day in November 2016 , this capability has already resulted in hundreds of millions in cost savings.[14]
Future Steps
These technological advances have so far resulted in more efficient operations, higher margins, and increasingly loyal customers, but Kroger is missing an opportunity to apply these competitive advantages to the grocery delivery industry. Kroger recently invested billions of dollars to acquire hundreds of stores in the Midwest, and also introduced 120 Wal-Mart-like supercenters. [15] [16] The $9.4-billion-dollar grocery delivery industry is growing at nearly 10% annually, which will pull customers directly from brick and mortar stores. [17] Kroger’s online platform and data collection need to be expanded and applied to grocery delivery. This service has the potential to make Kroger the industry leader by maximizing efficiencies through inventory management, labor utilization, and advertising. (799 Words)
[1] Bloomberg, “Kroger Will Save the Grocery Store.” https://www.bloomberg.com/gadfly/articles/2015-12-03/kroger-earnings-the-chain-quietly-gains-on-walmart-whole-foods, accessed November 2016.
[2] Wall Street Journal, “Grocers Feel Chill from Millennials.” http://www.wsj.com/articles/grocers-feel-chill-from-millennials-1477579072, accessed November 2016.
[3] The Balance, “U.S. Based 2016 World’s Largest Supermarket and Retail Grocery Chains.” https://www.thebalance.com/largest-us-based-grocery-chains-3862932, accessed November 2016.
[4] Wall Street Journal, “Grocers Feel Chill from Millennials.” https://si.wsj.net/public/resources/images/BT-AL820B_MILLS_16U_20161025124207.jpg, accessed November 2016.
[5] Kroger Company Speech Archives, “First Quarter 2010 Investor Conference Call Prepared Remarks.” http://www.thekrogerco.com/corpnews/corpnewsinfo_pr_speeches_speecharchives_06172010.htm, Accessed November 2016.
[6] Business Insider, “Kroger has a Game-Changing Grocery Service, and Moms Are Freaking Out About It.” http://www.businessinsider.com/moms-are-going-crazy-for-krogers-new-clicklist-service-2016-2, accessed November 2016.
[7] Retail Leader, “Online Grocery Shopping on Pace for 9.5% Annual Growth.” http://www.retailleader .com/ top-story-research-, online_grocery_shopping_on_pace_for_9.5_percent _annual_growth-1635.html, accessed November 2016.
[8] USA Today, “Kroger Tests ‘Smart Shelf’ Technology.” http://www.usatoday.com/story/money/nation-now/2015/10/04/kroger-tests-smart-shelf-technology/73320236/, accessed November 2016.
[9] Statistia, “Kroger’s Advertising Spending in the United States.” https://www.statista.com/statistics/298836/kroger-ad-spending-usa/, accessed November 2016.
[10] 84.51°, “What We Do / Retail.” https://www.8451.com/what-we-do/retail, accessed November 2016.
[11] USA Today, “Kroger Tests Smart Shelf Technology.” http://www.cincinnati.com/story/money/2015/10/02/next-shelves-giving-cues-kroger/73218252/, accessed November 2016.
[12] Bloomberg, “Tesco Moves Closer to Dunnhumby Sale After Kroger Agreement.” http://www.bloomberg.com/ news/articles/2015-04-27/tesco-moves-step-closer-to-dunnhumby-sale-after-u-s-agreement, accessed November 2016.
[13] McKinsey Global Institute, “Unlocking the Potential of the Internet of Things.” http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-internet-of-things-the-value-of-digitizing-the-physical-world, accessed November 2016.
[14] Cincinnati Business Courier, “Kroger Details Hundreds of Millions in Cost Cuts.” http://www.bizjournals.com/cincinnati/news/2016/11/03/kroger-details-hundreds-of-millions-in-cost-cuts.html, accessed November 2016.
[15] Kroger, “Kroger and Roundy’s Announce Definitive Merger Agreement.” http://ir.kroger.com/file/Index?KeyFile=31829737, accessed November 2016.
[16] Business Insider, “Kroger has a New Plan that should Terrify Walmart and Target.” http://www.businessinsider.com/kroger-has-a-plan-to-to-take-down-walmart-2016-8/#check-out-that-meat-selection-it-goes-on-forever-20, accessed November 2016.
[17] Retail Leader, “Online Grocery Shopping on Pace for 9.5% Annual Growth.” http://www.retailleader .com/ top-story-research-, online_grocery_shopping_on_pace_for_9.5_percent _annual_growth-1635.html, accessed November 2016.
Interesting article! It’s interesting how digital technology is transforming every single industry out there. The new data company that Kroger created, 84.51°, is interesting because it is giving Kroger so much new data that they didn’t have before. Since we just did the IBM Watson case, it got me wondering what Watson could do if it had all this information. Perhaps it would just be smarter about predicting purchasing trends and quantities? Giving Kroger total efficiency? I’m sure we’ll see AI influencing grocery stores eventually.
In the article you pushed for Kroger to focus more on the grocery delivery industry, but I wonder if that is the best move for them. It seems that most of the people who use grocery delivery services live in urban areas, and Krogers are mostly in suburban areas, where it might be easier for people to drive to the grocery store.
Great example of how a brick & mortar retailer is using digital technology to improve it’s operations and reduce costs. I agree that delivery could be a missed opportunity. However, there are companies like Instacart who already have developed this technology and have the back-end logistics system to support delivery. Instead of Kroger doing this in-house, they should outsource delivery to these companies. Building out the logistics network to deliver is not a core competency and it would take too long for them to develop this in-house.
Adam – highly stimulating post. I cannot tell you how many times I have forgotten to buy items that were on my grocery list! With this technology, I will never forget the Grey Poupon again, and Kroger will never again miss my Grey Poupon-related revenues – a true win/win. Do you think that Kroger will have to convince its consumers to install a Kroger related application on their devices? This seems to me to be a significant obstacle. I also wonder if the Company will be tempted to use its data to oversell products. For example, if the data shows that I purchase Grey Poupon every 9 weeks, will the Company adhere to this pattern or will attempt to sell me mustard that I do not yet need after 6 weeks? The ethics of big data-generated insights are fascinating to consider.
You’re right, Adam! there is definitely an opportunity in grocery delivery. However, I would argue (and agree with the comments above) that this might not be the best move for Kroger. In addition to where Kroger supermarkets are generally situated, I would also bear in mind that their core customer base might be reluctant to pay extra to have their groceries delivered to their homes. I think Kroger should focus more on the in store experience. I love the Smart shelving idea and the Clicklist. These and other time saving initiatives will undoubtedly minimize time spent by the customer in the stores and make Kroger more efficient in their operations.
Adam – this was a cool summary of the different angles from which Kroger is approaching the grocery delivery threat. I actually think ClickList has a great deal of potential. I researched the equivalent service from WalMart and found that customers really do value having everything pre-packed for them and brought out to the parking lot, even if it means they still have to physically drive to the store. It seems that customers are still willing to drive to the store – spending an hour roaming the aisles is the part they’d like to cut out.
I was surprised that Kroger spent $648M on targeted advertising. To me, it seems like this is a service that should more than pay for itself…it should be profitable. If Kroger could induce its suppliers to bid for “smart shelf” space, they could presumably make money. I’m picturing Coke and Pepsi vying for the right to have an ad pop up when customers walk by. Suppliers compete for many other types of marketing at the retailer level. If smart shelves and targeted advertising are the next frontier, Kroger should monetize them.
Adam, very interesting article. I’m surprised to learn that majority of Kroger’s investments in digital is not in grocery delivery given the trend of people moving toward online grocery. I agree with you that given how fast online grocery is growing, it is important that Kroger enters this space. I see from above comments that people are concerned that moving into online grocery is against Kroger’s competitive advantage. A possible solution would be to partner with a third-party online grocery service provider, such as Instacart, and pay them commissions for delivery service. While the margin will most likely be lower than in-store purchase, this strategy will allow Kroger to at least get a slice of the pie.
I pause to think about what value a real-life physical grocery store brings over its online and delivery counterparts. Perhaps to me the biggest difference is beating them out on shipping charges (and of course using technology as you say to lower their cost). But I also think that there is a customer service aspect to attracting people especially if we can make visiting a grocery store more of “an experience”. This would help differentiate a Kroger from online and would be something that can’t be replicated through digitization. I would be hard-pressed to create the full “experience” and describe what that would look like, but it may involve a combination of customer service, coupon activities, and maybe even free samples and trialables. Interested to see what the future holds–nice post.