CINCINNATI -- The future of grocery shopping got a little closer with online giant Amazon's announced purchase of Whole Foods last month. The question for Kroger, one of the nation's largest traditionalsupermarket chainsis: Can it compete?
The Whole Foods deal is "a barrel of cold water dumped" on the entire grocery sector, said David Yockelson, vice president of research firm Gartner. And it could be especially challenging forKroger, which has nearly 2,800 stores under the namesKroger, Ralphs, Dillons, Smith's, King Soopers, Fry's, QFC, City Market, Owen's, Jay C, Pay Less, Baker's, Gerbes, Harris Teeter, Pick N' Save, Copps, Metro Market and Mariano's.
What's at stake is the emerging digitalmarket for groceries—orders made online and either fulfilled via delivery or at-store pickup. That segment now isestimated at $20 billion in annual sales but is expected to be more than $100 billion by 2025.
Donna Doren, a 43-year-old mother of two from Mount Adams, Ohio, said shopping online and picking up at the store via Kroger's ClickList service saves her time, money and sometimes peace of mind.
“The bill is much smaller when you leave the kids home,” Doren said. “Last week at Kroger, I got waylaid by my kids into the toy department... I said, ‘Just get it all. I don’t care!’ At that point, I was weak. They wore me down.”
Most weeks, Doren uses ClickList to buy staples from snacks to paper towels to cheese. She prefers to select her own meat and produce.
Kroger, based in Cincinnati, has strengths as it faces off for theonline grocery customer against Amazon, the Seattle-based digital juggernaut that helped kill off Blockbuster and Circuit City. Meanwhile, it isn't clear whether or how strongly Amazon wants to engage in a grocery war.
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After dabbling in food delivery for years, Amazon announced on June 16 it would make its largest-ever acquisition.The $13.7 billion Whole Foods deal puts immense pressure on supermarkets, but also discounters such as Walmart, drug stores such as Walgreens and dollar stores such as Dollar General. All have used cheap groceries as a lure to boost customer traffic.
Yet the deal's price tag also underscores the costs and thechallengesof running a digital-only grocery. It's expensive to amass and operate the infrastructure to offer a broad array of fresh, perishable goods for prompt delivery.
Analysts say Amazon's takeover of Whole Foods was effectively a concession that it needed physical stores and a larger supply network to grow its food business —things that grocers like Kroger have.
"This tells us that retail still has a geographic component and that supply chain matters," Bernstein analyst Brandon Fletcher wrote in a June 16 note to investors. "Amazon is making a powerful move to solidify its grip on urban and wealthy suburban markets. But this leaves a long battle with Walmart, Kroger, Target and others."
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Amazon doesn't break out sales for its grocery business, but Morningstar analyst R.J. Hottovy estimates they're a little north of $8 billion. Combined with Whole Foods, it will be $24 billion—less than a quarter the size of Kroger's $115 billion business and less than a tenth of Walmart's roughly $250 billion grocery business.
Industry watchers say Amazon will use its deep pockets to lower prices and spruce up Whole Foods, whichhas a strong brand image, a loyal customer base and a physical presence "that could enable the online retailer to augment its current food delivery strategy," wrote Jefferies analyst Christopher Mandevillein a June 16 note to investors.
The natural and organic retailer has struggled to grow its sales and profits in recent years as competitorssuch as Krogerhave ramped up their own healthy fare.
Analysts expect Amazon to use Whole Foods to broaden its selection, but it remains to be seen by how much. Theyaren't sure how deep Amazon wants to get into the grocery business.
If Amazon sticks with a relatively limited selection, Kroger can continue to compete by providing a wider offering of goods —one of its core strategies.
In 2003, Kroger responded to agrowing threat from Walmartby lowering its pricing, but not by trying to undercut Walmart. Instead, Kroger lowered its prices enough to neutralize the price difference. It then used broader product selection, better store floor plansand customer service to win over customers.
The same thinking might allow Kroger's ClickList to win against Amazon. Kroger won't deliver to your house, but it offers 10 times the selection for at-store pickup.
"We continue to make the investments necessary to offer the best customer experienceboth in-store and online," CEO Rodney McMullen told Kroger shareholders June 22 at the company's annual meeting. "We’re making these investments because we believe the customer will want to engage on their terms in the future.And Kroger will be there for them."
Experts also can't decide yet whether Amazon wants to build or acquire more physical stores or will simply content itself to focus on digital, using Whole Foods products to sell more Amazon Prime subscriptions.
SteveBishop, managing partner of Brick Meets Click, a consulting firm specializing in online grocery shopping, suspects Amazon will use Whole Foods and groceries in general just as other nontraditional competitors have: to drive customer traffic and enhance sales for itscore products, including Prime subscriptions.
"I believe it's about capturing more business from households to support home delivery by driving more traffic through their network," Bishop said.
Zack Fadem, an analyst with Wells Fargo, in a June 26 note to investors said he sees Whole Foods as a chance to “learn” the grocery business, not take it over.
“An Amazon-Whole Foods combo … opens up the gate for Amazon to gain valuable consumer insights,” Fadem wrote, adding it would also smooth out delivery problems, speed its evolution into a physical as well as digital player and “provide a canvas to experiment” with new formats, channels,products and service levels.
Kroger bets big on ClickList
Amazon's salvo comes after two years of Kroger's aggressive expansion of a key digital strategy: its ClickList order-online-pickup-at-the-store service, which is now inroughly a quarter, or 700, of Kroger'sstores.
Kroger executives don't disclose their digital sales, but said those salesmore than doubled in the first quarter from the same period in 2016. The company also boasted a 30% increase in digital customers and visits.
The service allows customers to order groceries online for a scheduled pickup later, when associates will load items into your car at a dedicated spot or lane at the store.
The service costs $4.95 per orderafter three free orders for new customers.Kroger associates ring customers up on a tablet. Customers can use their coupons and their loyalty discounts. Transactions are paid with either credit or debit card; cash is not accepted.
Customers can choose from 40,000 items available in participating stores, including alcohol, frozen and refrigerated goods, produce and meat.
Associates say many users become heavy users, ordering 25 to 125 items per order.
Kerry Durban, 56 of Kenwood, was using the service for the first time on Friday. He was picking up a load of staples: soft drinks, salad fixings, coffee creamer and other items.
“My wife loves it, she told me to try it,” Durban said. “It’s pretty cool. I don’t have to walk around the store.”
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Kroger acquired the technology and business model for ClickList in 2014 when it acquired North Carolina's Harris Teeter chain. It began testing ClickList in the fall of 2015 and quickly ramped it up. In 2016, Kroger installed it at 420 stores and has added more than 50 so far in 2017.
In June, Kroger quietly stepped on the gas. The company's stock took a hit before Amazon's announcement when the company lowered its profit outlook. The reason was that Kroger decided to funnel an additional $115 million to $230 million investment into lower food prices, employee wages and digital initiatives. These investments are on top of a $3.2 billion to $3.5 billion capital budget for new stores or renovations.
Kroger has tinkered with home delivery for more than a decade, but so far hasn't found a model it wants to roll out nationally.
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