Source: Ocado promotional video
Kroger says it will transform grocery e-commerce with ‘first of its kind’ fulfillment tech
Forget about underselling and overperforming. Kroger is going all in with the launch of its first automated fulfillment center (AKA shed) as part of its deal with Ocado, the British grocery e-commerce leader.
Kroger, the largest supermarket chain operator in the U.S., said the new facility “transforms grocery e-commerce” by bringing together “vertical integration, machine learning and robotics” to provide fast and affordable deliveries to customers.
The new 375,00-square-foot shed, located in Monroe, OH, just north of Kroger’s Cincinnati headquarters, will operate with around 1,000 robots working along with 400 of the retailer’s associates to pick, sort and ship orders to customers. The robots “whizz around giant 3D grids, orchestrated by proprietary air-traffic control systems in the unlicensed spectrum. The grid, known as The Hive, contains totes with products and ready-to-deliver customer orders,” according to a company release.
Each of the facilities is expected to process as much as $700 million in orders on an annual basis and to do so more efficiently and at a lower cost than current methods. Kroger has said that each shed will enable it to cover up to 90 miles from its site and that its reach will extend to “significantly more territory when spoke locations are integrated.”
Kroger and Ocado signed a deal in 2018 to build as many as 20 of automated sheds in response to what, at the time, was a small but growing percentage of Americans ordering groceries online. The novel coronavirus pandemic hit the U.S. in the meantime, accelerating consumer usage of online grocery shopping. Kroger responded by expanding store-based fulfillment. The U.S. grocery giant currently makes deliveries from 2,472 stores and offers pickup at 2,223. Ninety-eight percent of all Kroger households are now covered by these services.
Ocado co-founder and CEO Tim Steiner said that his company and Kroger will open more sheds of various sizes across the country.
“We will also roll out components of our software solutions to stores in collaboration with Kroger’s existing seamless platform to support fulfillment of curbside pickup orders,” he said in a statement. “The breadth of this fulfillment ecosystem will be crucial in helping Kroger to continue to win in e-commerce across the U.S.”
Discussion Questions
DISCUSSION QUESTIONS: Do you expect the Kroger/Ocado partnership to transform e-grocery in the U.S.? Do you expect Kroger’s rivals, particularly large retailers, to develop similar grocery delivery distribution systems or to go in other directions?
Poll
BrainTrust
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
John Hennessy
Retail and Brand Technology Tailor
3-D fulfillment takes up less space because of the use the third dimension (Z-axis) and is a game changer. Space is used more efficiently and can be more and more local to the end-consumer. When fulfillment is close to the consumer, there are usually sustainability improvements too. This partnership is likely to transform grocery and other industries as well.
Robotics gradually are going to become a permanent fixture in retail. There are many use cases for it and, as is the case with most technology, robotics will become more affordable and more refined. Kroger is an early adopter and the industry will be watching. It is sure to influence grocers in that direction.
As Kroger successfully executes its automated micro-fulfillment centers (MFCs) and other large grocers see the results, it will accelerate the use of MFCs. The increased sophistication of robotics, coupled with the dramatic increase in e-commerce, has made automated MFCs an economical alternative to fulfilling from local stores.
I am not sure “transform” is the right word. There have been several of these systems out there for years, though not in the U.S. But what it does is give Kroger a huge competitive advantage against all others except the biggest with major resources and the mindset to take this step. It will create further consolidation in the industry.
Smart companies invest in the future. There is also a message in this action about where Kroger thinks the future of the business is and where they are pushing it to be.
The e-grocery wars are certainly heating up. Kroger and other big grocery players had to figure this out. Customers want convenience but retailers are unable to pass along the true costs of delivery.
In the short term, more e-commerce grocery orders mean less profitability for the likes of Kroger. But this is a classic investment project with clear projections on revenue growth in e-commerce and payback period. It also creates a competitive advantage – or at least ensures that Kroger is not left behind.
It’s a race in the last mile! Whether it’s Amazon drone delivery, autonomous cars, or even Walmart Plus delivery service, retailers are racing against each other to get that package on the doorstep. My question is – what will happen when a critical mass of consumers are vaccinated? Will the demand for all of this delivery still be as hot? If consumers, even a percentage of them, return to offices, will they be comfortable letting packages sit unattended? Or will there be more “lockers” a la Amazon Prime? I am not convinced that Kroger’s Shed will be a game-changer. Instead, I believe it will keep the grocer at par with other retail delivery options, which may or may not enjoy demand.
Kroger is clearly trying out something unique here. While most retailers are focusing on micro-scaling their fulfillment to their stores, Kroger is going the opposite way a la Amazon in setting up a centralized automated fulfillment center. Due to that, it will be far more economical to implement and operate, but if that helps in competing with other retailers on delivery times remains to be seen. Having said that, their partner, Ocado, has been very successful in the U.K., and I am proud of the fact that my colleagues at Capgemini helped power the high-speed robots for Ocado.
One logistics win is not going to “transform” grocery e-commerce in the U.S. The partnership with Ocado could very easily give Kroger a huge advantage and save costs, but their robots won’t take over the world of grocery e-commerce. Clearly there are opportunities to improve the supply chain for grocery e-commerce, so this is an important step.
The mitigation of the last mile has been one of the main challenges in the grocery industry. Clearly the great acceleration of COVID-19 has necessitated the grocery innovation imperative, which includes a far more comprehensive micro-fulfillment operation, powered by automation, robotics, machine learning, and AI.
With the rise of the e-grocery business, we should expect all major grocery companies, independent grocers, and wholesale distribution partners to leverage these micro-fulfillment operations to get closer to the end-consumer. There are clear economic and efficiency benefits.
With sustainability becoming increasingly significant, by meeting the customers where they are, the grocery industry is taking measurable steps to drive growth and improve the customer experience while considering the environmental impacts.
Kroger was the first to bite on Ocado’s offering–it was going to be someone. Ever since Amazon bought Kiva, competitors knew what direction they had to go.
This is the new normal for fulfillment with lots of similar offerings in all shapes and sizes and will take hold across all verticals in the next decade. Retail will not see a recovery to pre-pandemic levels due to some amount of repeat product purchases staying home-delivery staples. Therefore, investing now in this kind of long tail efficiency only makes sense.
Two notes:
When Kroger speaks, the competition should listen. This powerhouse of technology keeps getting it right. This is further proof that we won’t be returning to the past, but will charge ahead into the future.
Fascinating area. Kroger has definitely stolen the march on many rivals with their investment in the Ocado platform. It should drive incredible efficiencies in terms of enabling home delivery. It would be interesting to see if there is any form of exclusivity agreement for a period of time because Ocado want to expand their business with more customers.
For grocery rivals who want to compete with Kroger without also investing in the Ocado platform it becomes a very difficult choice: use a manual pick/dark store approach (will this scale?); attempt to build and fit together the technology needed to do this themselves (difficult as Ocado have spent 20 years building the platform); find an Ocado rival who has done it (Amazon are probably the closest but it is not clear if this is an option yet).
I will be watching with interest.
Kroger is transforming its operational potential, but not necessarily the industry. Kroger made a big bet on its partnership with Ocado in 2018 that e-grocery would follow a growth trajectory that would ultimately make an investment of this scale a competitive advantage. That doesn’t necessarily mean just gaining market share, but could also be in terms of profitability or operating efficiency. But many other retailers – Walmart, Albertsons, Ahold Delhaize, Meijer and H-E-B among others are already looking at versions of micro-fulfillment or other automation as well. There is not a one-size-fits-all solution for e-grocery, so there will be different strategies for each organization, and not everyone will need to (or should) follow Kroger’s path. But ultimately success depends on consumers, and whether demand for home delivery (in Kroger’s case) will be high enough to be able to generate the returns expected on these investments.
High points for automating order fulfillment to increase the profitability of e-commerce orders. Miss on this automation happening away from stores and still requiring delivery to store. Locations and pickup at store are the advantages a supermarket has over Amazon. Store-located MFCs with customer pickup both improves e-commerce fulfillment profitability and eliminates last mile costs. This will be interesting to watch.
I respect Kroger’s initiative and desire to lead in a segment that will only grow over time, but I have a couple of genuine questions (that maybe some other readers can address). Two of the historical barriers to grocery e-commerce adoption have been the cost of delivering the last mile and shoppers’ concerns over selecting perishables. While the shed will reduce picking costs, I don’t see how it addresses either of these issues. Perhaps we need to look at it as just a piece of the puzzle (which is not how Webvan was built back in the early 2000s).
Kroger continues to invest in areas that it sees will make a difference. We have seen the struggles that brick-and-mortar retailers have endured as they attempt to compete with Walmart and the rest of the online companies.
Omnichannel is not about channels. It’s about conveniently serving its customers. Kroger takes this seriously and it should make a difference to its top and bottom lines.
Without a doubt, it will offer Kroger a competitive edge in the market, bringing ecommerce purchases to the customer faster. They will be prepared for continued future growth of g-commerce. However, the market penetration in grocery and profitability is not there yet. What Kroger will do is make their online grocery sales profitable or rather affordable as I expect 20 of these sheds will be a hefty cost for several years. Rivals will be forced on a similar path for automating distribution and fulfillment, but will operate on independent timelines before it becomes a real threat. Laggards will see continued deteriorating sales without some kind of mechanism to catch up to service levels that Kroger and others will offer.