June 13, 2018

KR - Optimism for Kroger, Ocado Partnership

KR, OCDO LN
By Robin Macleod

Sources were cautiously optimistic about Kroger’s new partnership with Ocado despite some skepticism about the cost of rapid expansion of fulfillment centers.

Kroger, Ocado Partnership
Suppliers were fairly optimistic The Kroger Co.’s push into online grocery would benefit long term from the company's recently announced partnership with U.K. online supermarket Ocado Group PLC, but some sources remained skeptical, particularly about Kroger’s commitment to open 20 online fulfillment centers in three years. Two suppliers and one industry consultant said the Ocado partnership was a positive move for Kroger, while two others were undecided. “Kroger is buying into this Ocado deal because if they don’t, they feel that they are going to be left behind Amazon[.com Inc.] and Walmart [Inc.],” one said. “They know they have to have an ecommerce game too, whether they can make a profit on it or not. That’s why people are willing to spend silly money on ecommerce. If they don’t, they see themselves losing the whole basket to Amazon or Walmart.” However, one supplier, who was undecided on the potential outcome of the partnership, said, “Kroger is overreacting to Amazon. They’re throwing so much out there from ClickList to online to Ocado. Of course, consumers are going to move in that direction and Kroger needs to address that movement, but they’re throwing 10 things at it instead of focusing on one or two.”

Three sources said Kroger could benefit particularly from Ocado’s state-of-the-art warehouse and delivery route technology. “Building 20 warehouses will be expensive, but Kroger feels they have to do it. Having Instacart [Inc.] doesn’t improve Kroger’s margins. But having Ocado on the back end could improve operational efficiencies and eventually improve margins,” one said. Another said, “At the moment, Kroger’s warehouses are designed for sort shipping. Ocado is bringing a warehouse picking capability. They also have great technology around route delivery [that is] more sophisticated than Instacart and others.” Sources said Kroger’s commitment to expand online ordering could particularly hurt smaller supermarket chains. “The weaker regional players like Bashas [Inc.] and Albertsons [Cos. Inc.] divisions are really going to struggle,” one supplier said. “If Bashas loses 5%-10% to online, they’re out of business.”

Online Initiatives
Although the U.S. grocery industry is still in the early innings of adapting to online ordering, one supplier said Kroger had the best online strategy among food retailers. “There is a lot of growth in the drive-by grocery pick-up business,” the supplier said. “Walmart is doing a lot to grow in that area, but I think Kroger is more equipped than any other grocery retailer to grow their digital business. The Kroger team is extremely methodical. They do their research. Kroger has research departments no one even knows about. They’re investing a lot in big data." One supplier said Whole Foods has the best online strategy because of its relationship to Amazon, and another said regional player Meijer Inc. had the best online strategy. However, another supplier said none of the food retailers stood out with their online strategies. “I don't think any of the food retailers are doing a great job at online,” the source said. “They're all scrambling trying to figure it out. I just saw a [Wakefern Food Corp.] ShopRite in New Jersey where they carved out a part of the store to handle online orders. It was so antiquated. The only online service where we've seen great results is Instacart.” 

Wholesale Prices
Wholesale prices increased during February through early May compared with the prior three months for two suppliers and one beverage distributor, and one supplier said price negotiations were tough. “Kroger has been pushing back hard with all manufacturers. This was the most difficult [price] negotiation we had with any retailer.” Another supplier, who did not attempt a price increase, said, “From what I understand, both Kroger and Walmart won't even entertain any price increases from vendors. There's a lot of pressure mounting on branded products versus lower-priced private label.” Three of four responding sources expect no additional price changes during the next six months, while one adult beverage distributor anticipated small increases on select products throughout the year.

Market Share
Kroger gained market share during February-April for four of six suppliers, mostly from smaller regional chains as well as independent grocers, while the other two said Kroger maintained market share. “The fact that Kroger has their own distribution centers allows them to avoid the markup distributors charge,” a natural foods supplier said. “Their frozen department margin is a few points lower than Whole Foods, for example. Our items are typically about $1 less per item at the shelf, compared to natural channel retail prices.”

Kroger’s FY1Q18 orders increased for five of six suppliers as well as both distributors, in line with expectations for all seven. “Kroger is open to new products. They are not limiting our offerings just because they have alternatives with [Kroger’s private label] Simple Truth,” a supplier said. “They've made it clear they want private label and branded.” The remaining supplier said orders decreased yy because of weak traffic.

ADDITIONAL QUOTES
“Kroger is gaining market share from smaller, conventional players; they're killing retailers like [Southeastern Grocers] Bi-Lo and Winn Dixie stores in the south.”

“No doubt Kroger gained market share -- if not from national competitors, then certainly from smaller competitors. Any grocery retailers who are late adopters of ecommerce are losing share and will continue to do so.”

“Kroger likely gained a little share from the weaker players like Bashas and [Albertson's] Safeway, but Walmart and Target [Corp.] are doing better for me than Kroger.”          

“Kroger’s big push this year is that if manufacturers are shorting them on anything, the manufacturers are charged for it. They’re also pushing manufacturers for shelf-ready packaging so all they have to do is slide the box on the shelf and tear open the front. If you short them 20% of an order, they’re going to charge you -- which they weren’t before.”

“Kroger is overreacting and not focusing enough on every day issues. It’s interesting that Kroger would jump in with Ocado. Obviously, they’re not happy with what they’ve been doing so far [with online options].”

“Ocado is world class [in online food distribution], so that should give Kroger a cost advantage. Anything that goes through the Ocado warehouse is going to be the most efficient in world. Kroger is not retrofitting stores [like Walmart].”

“Kroger already does a great job; this partnership [with Ocado] will definitely help them with ClickList.”

“The new venture with Ocado is no small announcement. Ocado is one of the top [online grocery] organizations in the U.K. and very well respected.”

“I'm skeptical about this Ocado deal. I don't understand how they can build 20 fulfillment centers in three years.”

“What Target did was buy a delivery agency when they bought Shipt, but there’s no cost savings for that; it just gives you access to labor. But Ocado gives Kroger access to potential cost savings and how to do ecommerce more efficiently.”

“Ad revenue is how Instacart is really improving. We started a few years ago with Instacart, but recently, we've been seeing more success with them. They're also providing us with more sales information on our products going through their digital site. For us, Instacart is a very targeted spend. We see exactly what numbers are generated through the promotions we do with them.”

Contributors: Donna Crothers, Carin Davenport and Anna Rubino

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